Gold Breaks Records While Savers Wait

5 min read

Gold has just had its strongest month in almost four years. In March the price rose by more than 9% to a string of new all-time highs. In pounds it reached a record too. It did all of this while interest rates sat at their highest level in a generation. That should make every saver stop and think about what is happening to money.

A record month in plain numbers

Gold began the year close to the record it had set in December. By 28 March it had set a fresh record in New York. March alone added more than 9%, the best monthly gain since July 2020. The new financial quarter has opened in the same way, with fresh records in the first days of April.

For British buyers the picture is just as striking. Gold moved sideways in pounds through January and February. By the end of March it had broken clear of that range to a new high. That is a record in sterling as well as in dollars.

Rates are high. Gold rose anyway.

The textbook says gold struggles when interest rates are high. Gold pays no interest, so when cash in the bank earns 5% the argument goes that nobody needs it. That textbook is being tested.

On 20 March the US Federal Reserve held its main rate at 5.25% to 5.5%, the highest in over two decades. The next day the Bank of England held Bank Rate at 5.25%, the highest since 2008. Both said they were in no hurry to cut. Gold set its records in the same week.

Markets expect cuts later in the year. That helps. But expectations alone do not explain a 9% month. Something deeper is at work.

The quiet buyers

The most important buyers of gold today do not appear on television. They are central banks. According to the World Gold Council, central banks added 1,037 tonnes of gold to their reserves in 2023. That followed 1,082 tonnes in 2022, the highest on record. It is the first time on record that central banks have bought more than 1,000 tonnes two years running.

The largest single buyer last year was the People's Bank of China, which added 225 tonnes. It has now reported additions for 16 months in a row. Poland, Singapore, India and Turkey have also been buying. Central banks added a further 39 tonnes in January alone.

These institutions are not chasing a price. They buy steadily and they hold for decades. When the people who issue money choose to hold more gold, it is worth asking why.

A record year for demand

The full picture for 2023 shows how much of the market these quiet buyers now make up. The World Gold Council reports that total gold demand last year, including large private deals made directly between buyers and sellers, reached 4,899 tonnes. That was a new annual record.

Other parts of the market were far weaker. Gold exchange traded funds saw outflows of 244 tonnes, their third year of decline in a row. Demand for bars and coins fell 3%. Jewellery demand edged up by only 3 tonnes on the year, so it was barely changed. Without the private deals, demand was 4,448 tonnes, down 5% on 2022. Total supply rose 3%. Recycled gold rose 9%, while mine production rose by just 1%.

Yet the average price for the year was a record $1,940.54 an ounce, 8% higher than in 2022. In other words, gold set a record while some of its best known buyers were selling. The difference was made up by central banks and by large private buyers, which is why the price has been so resilient.

What it says about money

Gold is not rising in a vacuum. Since 2008 central banks have created money on a scale never seen before. Governments in Britain and America carry debts close to the size of their entire economies. UK inflation has fallen to 3.4%, but prices are now far higher than they were three years ago and they are not coming back down.

The February figure was the lowest since September 2021, down from 4% in January. Food inflation fell to 5% from 6.9%. The Chancellor, Jeremy Hunt, pointed out that food inflation "was nearly 20% a year ago". Grant Fitzner, chief economist at the Office for National Statistics, said "food prices were the main driver of the fall". A slower rise is welcome. But food prices that rose by nearly a fifth do not fall back when inflation slows. They simply rise more gently from a higher level.

The public finances tell the same story. In March the Office for Budget Responsibility forecast that UK debt, on its main measure, would rise from 88.8% of GDP in 2023 to 2024 to a peak of 93.2% in 2027 to 2028. On the wider headline measure it was 97.6% of GDP, close to the size of the whole economy. The OBR expects it to edge up to 98.8% next year before easing. It also warned how fine the margins are. Interest rates on government debt just 0.3 percentage points higher than expected would wipe out about £9 billion of the room the Chancellor has to meet his target for debt to fall.

Every pound printed and every pound borrowed dilutes the pounds already in your account. Gold cannot be printed. Its supply grows slowly, by around 1% to 2% a year. Over long periods that difference shows up in the price. A record high in gold is, in large part, a measure of how much paper money has lost.

Central banks understand this better than anyone. Many hold large reserves in dollars and euros. Gold is the one reserve asset that is no other country's debt. It cannot be frozen by a foreign government or diluted by a foreign printing press.

Why savers are still waiting

Many British savers have been content to leave money in the bank while rates are high. That is understandable. But a 5% rate does little if prices rise by a similar amount. Rates will not stay at these levels for ever. Cash in an account is still a claim on a bank, held in a currency that loses value over time.

The sums are simple. A saver earning 5% on £10,000 receives £500 over a year before tax. With inflation at 3.4%, goods that cost £10,000 a year ago now cost about £10,340. That leaves only £160 of interest above the rise in prices, before any tax is paid. Once tax on the interest is paid, very little real gain is left.

Gold works differently. It carries no counterparty risk and no reliance on any government. UK legal tender gold coins such as the Britannia and the Sovereign add a further benefit: gains on them are exempt from Capital Gains Tax for UK residents.

The central banks are not waiting for the perfect moment. They are building their holdings patiently, month after month. That is a lesson worth noting.

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Sources

This article is for information only. The value of gold can go down as well as up.

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Gold Insights are independent articles, researched and written by our own team at Gold Tier Advisory.