Gold price: flying dragon in the sky!

In the Chinese Zodiac, the Dragon is the most powerful and auspicious symbol. In this regard, how will gold price unravel in 2024, the Year of the Dragon?

On 1 February 2024, I sold my remaining gold portfolio – a Canadian Gold Maple Leaf bullion that I had purchased from UOB Bank in 2014. The bullion was purchased at $1692 and divested for a profit of $1034. This represented a 61% return for a holding period of 10 years. The rationale for my recent bullion divestment was purely driven by the current bullish gold price.

The last time that I had divested my gold investment was in 2017. Back then, I had made a profit of 10% on the back of buoyant gold price. I had decided to cash out to consolidate my funds for the purchase of my matrimonial home.

So far, all my gold investments were made with UOB Bank. These included physical gold and gold savings account. When buying physical gold from UOB Bank, it is important to note that you must ensure that the physical gold is in its original sealed condition and the original UOB invoice must be presented. In addition, with effect from 30 November 2023, customers must be a UOB account holder in order to purchase physical gold from UOB.

My approach towards gold investment is that of a pragmatic one – buy low and sell high. As such, I may buy bullion again when gold price drops. Then again, trying to forecast the trend of gold price is becoming more and more challenging nowadays. Previously, I had made the bold call of gold price hitting US$3000 per troy ounce in 2023. That obviously did not happen despite the Ukraine-Russia and Israel-Hamas conflicts. Gold price often surges during times of uncertainty due to the status of the yellow metal as safe haven. Nevertheless, I am still happy to sell my bullion at the current gold price.

Looking back, gold price bottomed from US$1833 per troy ounce on 7 October 2023 when Hamas launched a surprise attack on Israel. Gold price then enjoyed a year-end rally as analysts began to fuel expectations of interest rate cuts by US Fed in 2024. Against this backdrop, how will gold price unravel in 2024?

Gold price supported by strong central banks’ demands?

According to the World Gold Council, Singapore’s MAS became the world’s third largest gold buyer for the first nine months of 2023. The central bank added 75 tonnes of gold during that period. According to the MAS website on International Reserves and Foreign Currency Liquidity, the volume of gold held in our national reserves in December 2022 was 4.94 million troy ounces. 

As at November 2023, the volume of gold held surged to 7.40 million troy ounces. Thus, the increase in gold held in Singapore reserves represented about 50%. This means that within a year, MAS had increased gold bullion by a significant quantum. More remarkable is that the MAS had bought at the levels between US$1,700 to US$1,900 per troy ounce. At current gold price of US$2,000 per troy ounce, the central bank must be laughing all the way to the bank.

Generally speaking, the MAS is very discreet when it comes to gold buying as it does not make any public announcements over the years. As such, the average gold prices at which the MAS had entered could not be determined. Even though I doubt that the regulator had bought at the lowest prices, the fact that gold price had rocketed after the MAS’ buying vindicated that the purchases were very, very shrewd.

Given that these were the first gold purchases since June 2021, it is evident that Singapore government is not a big fan of bullion. Unlike retail investors, central governments bought bullion as a means to diversify reserves. For Singapore government, this is no exception. Question now is what could have prompted Singapore government to buy gold and if this is the perfect time for retail investors to buy gold?

Next financial crisis from China?

The ongoing collapse of China stock market has purportedly wiped out US$7 trillion since 2021, adding on further blow to the economy beset by the protracted real estate meltdown and regulatory crackdown on the tech sector. Furthermore, 2024 is also the year of the US Presidential Election, which will inevitably cast the perennial spotlight on the US-China trade tension.

According to the State Administration of Foreign Exchange, China’s net capital outflows reached US$75 billion in September 2023, the highest monthly level since January 2016, decreasing by almost 90% from a year ago. There are growing signs of foreign institutional investors exiting the China market as investors are spooked by the troubled economy of China.Perhaps, due to these uncertainties, the Chinese government had ramped up its gold purchases as it became the world largest gold buyer in 2023. Gold’s performance during times of crisis and its role as a long-term store of value are key reasons for central banks to hold gold.

The People’s Bank of China (PBoC) now stands at a mammoth 2,235 tonnes. According to the World Gold Council, central banks is a key driver of gold price as they have been consistent net buyers on an annual basis since 2010, accumulating over 7,800 tonnes in that time.

Will there be another Great Financial Crisis in 2024? Nobody knows for sure. Back in 2008, the Great Financial Crisis saw gold price soaring from US$900 per troy ounce in 2008 to US$1,800 per troy ounce in 2011. Those who had bought gold in 2008 and sold off their holdings in 2011 would be laughing all the way to the bank. As such, a potential banking crisis in 2024 could represent a buying opportunity for gold buyers.

Interest rate cuts in 2024?

And then, there is the interest rates. To fight inflation, US Fed has raised interest rates 11 times between March 2022 and July 2023. In December 2023, the Fed has signalled its intent to make three quarter-point cuts in 2024. However, it is unknown when the Fed will cut interest rates in 2024.

In 2023, the series of interest rate hikes by US Federal Reserve led to the failures of four large US banks – Silicon Valley Bank, Silvergate, First Republic and Signature Bank ignited global fear of contagion in the financial sector.

In particular, the overnight disappearance of Silicon Valley Bank had not only sparked off a global shockwave, but also sent numerous tech companies in US into a tailspin as many of them had deposited funds in the bank. Amid the turmoil in the banking sector, gold price surged from US$1,809 per troy ounce to almost US$2,000 per troy ounce within two weeks.

Over in Europe, cracks in the banking sector started to appear with the forced marriage between UBS and Credit Suisse, which has been dogged by scandals for several years. Although the merger between the two Swiss banks had managed to avert a financial crisis from imploding in Europe, Credit Suisse’s Additional Tier 1 (AT1) bonds’ value (US$17 billion) were completely wiped out while shareholders of Credit Suisse could still get back some monies.

With the uncertainty in the banking sector, there is a strong possibility that gold price will cross the pivotal US$2,000 per troy ounce resistance level to smash a record US$3,000 per troy ounce. This is not an impossible scenario as the emergence of the pandemic in 2020 led to gold price surging to a high of US$2,040 per troy ounce in August 2020. Gold price was in buoyant form in 2020 because the precious metal is viewed as a safe haven in times of uncertainties.

Conclusion

Given the uncertainties in the banking sector, it may be worthwhile to consider buying gold if you have set aside sufficient emergency funds. If you are buying physical gold, make sure to buy from a reputable bullion dealer.

In Singapore, two of the most bullion dealers are BullionStar and UOB. The main advantage of BullionStar’s (BSP) is the opportunity to convert your gold savings to physical bullion bars, produced by LBMA refineries, at any time without any extra cost whatsoever. On the other hand, UOB gold savings account cannot be converted to physical gold or gold certificates. The UOB gold savings account is also not backed by physical gold.

Over the years, I am heartened to note that BullionStar has gone from strength to strength to become one of the leading bullion dealers in Singapore. Obviously, I hope that I have contributed in some small ways in their development. Earlier this year, the company had expanded their operations to United States. On this note, I am of the belief that BullionStar will continue to be a success story in the international bullion dealing community. Till then, enjoy the ride.