By Jason Kururangi

Milford Portfolio Manager

Gold is an interesting commodity; beautiful in its glitter and yet it primarily sits in sunless, secured vaults all over the world.

While Milford does not own gold directly in our Funds, from time-to-time we may have exposure to gold producing companies.

One of the founding principles in economics is the relationship between supply and demand. Gold is no different. Its overall supply does grow through time as gold is not necessarily "consumed" but is often stored. The rate of growth, however, is somewhat constrained given the finite amount of gold available to be mined. For supply to grow quicker (assuming mined gold is just stored), mine production needs to grow, and this is typically a relentless battle against more complex deposits, lower grades and higher costs. Given this, gold is considered scarce, despite additional supply coming to market each year. 

Regarding gold demand, there are typically three key drivers which arguably have the most influence over price in the short term:

1. Gold tends to be held as an asset by central banks
2. Demand for jewellery 
3. As an inflation hedge and store of value

The past few years have seen a volatile backdrop for gold. Gold has seen significant central bank buying in the lead up to the Ukraine War and post. Significant incremental buying in 2023 was seen by China and Poland (Source: World Gold Council). One of the arguments here for central bank buying is to help some economies be less reliant on the US dollar and US dollar assets. Gold provides a diversified set of reserves for central banks and is particularly common in some emerging markets. 

An arguably more complex driver is the perception of gold as an inflation hedge. This is a complex interplay that in its simplest logic states that if growth is high, this tends to be when the supply of money in the economy is growing. Unless interest rates are raised to slow growth, inflation is higher which reduces the purchasing power of that currency. The value of an asset like gold, however, should retain its relative purchasing power. Conversely, if a central bank is pursuing tight monetary policy to contain this inflation, it can have the opposite effect on gold. 

Why is this interesting now?

When central banks begin cutting interest rates to support growth, you tend to see real interest rates (interest rates adjusted for inflation) also decline, and therefore an improvement in the value of scarce real assets like gold. Where this gets increasingly complicated is around the nature of central bank policy and timing of moves. It is also intertwined with central bank physical buying of gold, which at this stage remains elevated. 

We appear to be in an environment suitable for gold to perform well with growth and inflation higher, as well as one where there is a chance of lower global interest rates which would likely continue to be supportive for gold. So whilst we are not necessarily calling the gold price to continue going up, there is certainly a scenario where scarce assets like gold continue to appreciate in price.   

If you would like to talk with any of Milford’s Wanaka-based Wealth Management team, please feel free to get in touch on 03 443 4695. Financial Adviser Disclosure Statements are available on request free of charge. 

Disclaimer: Past performance is not a reliable indicator of future performance. Milford Funds Limited is the issuer of the Milford KiwiSaver Plan and Milford Investment Funds. Please read the relevant Milford Product Disclosure Statement at milfordasset.com. Before investing you may wish to seek financial advice. For more information on our financial advice services please visit milfordasset.com/getting-advice

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