Record-high prices unlikely to dim gold’s allure as Asia’s year of elections loom

From Indonesia to India, the world’s largest democracies will be heading to the polls in Asia, a region which has traditionally been the largest gold consumer
Geopolitical tensions have kept gold prices above the US$2,000 range this year

Indonesia

Biman Mukherji

Published: 3:30pm, 22 Jan 2024

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Gold’s lustre shone brightly through 2023 amid geopolitical tensions, and its demand is likely set for another bumper year with elections looming throughout Asia, as well as more safe-haven buying by central banks expected.

The price of gold rose by 15 per cent through the year to hit an all-time high of US$2,135.39/oz in December, driven by geopolitical tensions in Gaza and Ukraine, as well as hopes the US Federal Reserve will cut rates.

From Indonesia to India, the world’s most populous democracies will be heading for polls in Asia this year, a region which has traditionally been the largest gold consumer. The United States will also be among 70 other countries holding elections.

Asian central banks turn to gold to reduce risk from US dollar

“All [elections] are all important. But some elections have the ability to influence world affairs more so than others,” said Shaokai Fan, Global Head of Central Banks for the World Gold Council (WGC), highlighting that gold prices rose over the past weekend when Taiwan held its elections.

William Lai Ching-te, a candidate whom Beijing branded a “troublemaker,” won in the Taiwanese presidential election, possibly fuelling cross-strait tensions. Investors flock to gold during times of uncertainty because it is considered as a store of value.

In the run up to Turkey’s elections last year, local demand for the precious metal surged as general uncertainty caused volatility in the national currency the lira, forcing local authorities to intervene, Fan said, citing how polls can influence buying.

A woman picks a gold earring at a jewellery shop in India. The country is traditionally one of the largest buyers of gold. Photo: Reuters

But he added that global prices are determined by a number of factors, and an election such as the one in Turkey, is only one component.

Turkey’s central bank had unveiled measures last year in May to mute gold demand among households and deter them from cash withdrawals, amid concerns the buying would deepen the country’s trade imbalances.

Geopolitical tensions have kept gold prices above the US$2,000 range, even this year, amid a backdrop of escalating tensions that have spilled over into the Red Sea in violence between US-backed forces and Yemen-based Houthi militants.

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US-led coalition strikes Iran-backed Houthi fighters in Yemen

The US on Wednesday put the Houthi rebels back on its list of terrorist groups, as the militants attacked their second US-operated vessel in the region this week. Earlier, American and British forces launched air strikes against the militants in retaliation for attacks on ships that the Iran-backed fighters say is a response to the Gaza war.

“I think that international tensions and geopolitical uncertainty has been a theme since the Russian invasion of Ukraine in 2022. And that has absolutely impacted the gold price, in terms of short term spikes,” said Shaokai Fan.

Washington’s seizure of Moscow’s foreign exchange reserves of US$650 billion in February last year, triggered a buying wave by central banks as many of them wanted to diversify holdings away from the US dollar.

“I think that was a wake-up call to some central banks as well, because they might have thought that their foreign exchange reserves were not freezable,” Fan said.

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Geopolitical hotspots may widen

The Israel-Gaza war may not be significantly influencing prices, but it can jolt markets the longer it proceeds, he said.

“If these conflicts exacerbate, more countries get drawn in and the global picture will increasingly become uncertain, which will in turn impact the gold price,” Fan added. “We saw Iran firing missiles at Pakistan. And now, more action in the Red Sea against the Houthis.”

Pakistan launched strikes on separatist militants inside Iran on Thursday, in a retaliatory attack two days after Tehran said it struck the bases of another group within Pakistani territory.

In general, lower interest rates remove headwinds for gold, they allow more people to consider moving into gold, whether at a retail level or at an institutional level

Shaokai Fan, World Gold Council

Expectations that the US Federal Reserve will reverse its cycle of hiking interest rates this year may bolster gold demand further.

“In general, lower interest rates remove headwinds for gold, they allow more people to consider moving into gold, whether at a retail level or at an institutional level,” Fan said.

Gold usually has an inverse correlation with the American dollar, the value of which is likely to fall whenever the interest rates are reduced.

However, higher interest rates over the past year-and-a-half did not cause the precious metal’s price to fall because geopolitical tensions countered the negative sentiment by fuelling its safe haven demand.

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The world’s top gold consumer, China, is also likely to maintain a red-hot buying streak despite a slow economic recovery denting incomes.

“It will likely remain strong in China, despite the fact that the economy has been slightly faltering. We have seen pretty strong demand for retail gold among ordinary people throughout the course of 2023,” Fan said.

Investors’ concerns about mainland China’s economy, its rocky real estate sector as well as Beijing’s tensions with Washington, which may increase following Taiwan’s election, are expected to whet Chinese appetite for the precious metal, he said.

“I think that [global] uncertainty will continue to support the price of gold, and the gold market among investors.”

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