Not only central banks seek a larger position in physical gold. Clients of asset managers are increasingly requesting gold as an investment. Geopolitical tensions, inflation uncertainties, and high equity market valuations are driving this trend towards the precious metal.
At ABN Amro, client inquiries about gold investments have surged since Russia’s invasion of Ukraine and the high inflation of 2022. Optimix reported that clients have been comfortable with their gold positions since the same period. Gold trading firm Doijer & Kalff noted a 32 percent month-on-month increase in gold purchases at the time of Russia’s invasion and continues to experience higher buying levels than before.
«It’s been more about gold since the war between Russia and Ukraine,» said Diemer de Vries of Amsterdam-based Optimix. «Geopolitical tension is fueling more demand from our clients.» As one of the portfolio managers, De Vries liaises directly with Optimix’s clients.
At ABN Amro, the demand is driven primarily by gold’s image as a reliable investment during periods of turmoil, according to investment strategist Thomas Pellegrom. Besides geopolitics, inflation, and high equity valuations, he also points to the situation in America as a reason for increased interest in gold. «The elections and the rising national debt create uncertainties that people want to protect against,» he said.
Tracking gold
De Vries echoes this sentiment: «Uncertainty around geopolitics, inflation, political power shifts in the Netherlands, and the potential return of Trump. Our clients want safe investments because they feel they live in an uncertain, chaotic world. However, we must separate sentiment from the technical aspects of investment.»
Optimix has been building its gold position since 2018, initially with around 3 percent in a tracker with a claim on physical gold. This year, it added more, now holding a 6 percent position in its balanced portfolio. «It fits investment-wise and aligns with our clients› sentiment,» said De Vries.
“In the next one to two years, 3,000 dollars per troy ounce could be within reach.”
Arjen van der Meer, Optimix
At ABN Amro, despite the demand from wealth customers, actual investments have «hardly» materialized, according to Pellegrom, who does not comment on the amount of gold owned by wealth customers or any percentage changes.
Doijer & Kalff experienced a spike in gold purchases in February 2022, which weakened in subsequent months. A similar spike occurred in March 2023 when US banks faced troubles, followed by a weakening.
These spikes are also reflected in the gold price. In March 2022, it rose above 2,000 dollars per troy ounce (31.1 grams), only to fall slightly above 1,600 dollars in October 2022. Currently, gold stands above 2,400 dollars per troy ounce.
Eastern central banks catching up
ABN Amro underscored the significant role of central banks in establishing the gold price. «We see that the rise in gold price runs parallel to increased demand from central banks,» Pellegrom said.
Reinoud Bogert, partner at Doijer & Kalff, noted that in addition to geopolitical tensions, upcoming interest rate cuts, high inflation, massive money creation, and unsustainable sovereign debt, gold benefits from «large gold purchases by central banks from the East.»
«The percentage of gold in the total reserves of Eastern central banks is far below the average of 40 years ago. The catch-up happening now is impressive,» Bogert said. «This trend began in 2010 and still has a long way to go. Central banks are exchanging their US dollars for gold, and more consumers are following suit. This is why gold prices hit a new record last week.»
Central banks added 1,037 tonnes in 2023
Since May 2023, central banks have been net buyers of gold, according to the World Gold Council. This trend was also observed between February 2022 and February 2023. Central banks added 1,037 tonnes of gold to their stocks last year, slightly down from the record 1,082 tonnes in 2022. This year, Turkey, China, and India are the main buyers. The United States holds the largest gold reserves with over 8,000 tonnes, while the Netherlands ranks tenth with over 600 tonnes.
For comparison, gold reserves at Luxembourg’s central bank remained unchanged at 2.24 tonnes in the first quarter of 2024 when compared to the end of 2023, according to the World Gold Council. Belgium’s gold reserves stood at 227.40 tonnes at the end of March.
According to recent surveys by Invesco and UBS, central banks are keen to increase their gold allocations. Nearly a quarter of central banks increased their gold positions in 2023, and another 30 percent plan to do so in the coming year, according to UBS Asset Management.
Fixed portfolio component
Optimix plans to keep gold as a fixed component in its portfolio «until further notice,» said portfolio manager Arjen van der Meer.
«We saw it as a strategic addition in 2018, alongside equities and bonds. Recently, with the rise in the gold price, more tactical reasons have emerged. In the next one to two years, 3,000 dollars per troy ounce could be within reach. Will we sell then? If we reach 3,000 dollars and the market is as positive about gold as it is now about tech, likely. Strategically, we will then hold one or two percent. We don’t see the environment changing anytime soon; this is a changing world order.»
Gold spot prices (Source: World Gold Council)
