The gold market has been transformed in the past 30 years. Production and demand have soared and the axis of the market has shifted definitively East. Looking ahead to 2048, what can we expect from gold? World Gold Council chief strategist John Reade assesses possible outcomes.
It is almost a truism to say that predicting the future is a thankless task. And the gold market has undergone so many changes over the past three decades that forecasting where it will go next may be considered virtually impossible.
That said, a number of recent market developments were in sight even in the 1980s and, looking ahead, it may be easier to forecast longerterm trends, as they suffer less from short-term cyclicality. Of course, it is almost impossible to forecast the out-of-the-box changes but we’ve done our best.
Our report highlights some common themes:
We don’t account for a major geopolitical event such as a world war but we do expect regional conflicts to continue.
Population growth will continue, albeit at a slower pace, and the global economy will grow too, although there will be a greater contribution from emerging markets than currently developed economies.
China and India will become the world’s largest economies but both countries will face challenges. China needs to overcome the potential roadblock of the middle-income trap. India needs to continue restructuring its economy and reducing bureaucracy to achieve its potential.
Africa has the greatest potential to deliver transformational change, provided it grasps the opportunity presented by its youthful population.
On a global level, climate change is also expected to become an increasingly important issue for companies, governments and individuals so efforts to curb greenhouse gas emissions will grow.
For centuries, gold has been valued as a financial instrument and an object of beauty. Those twin roles persist to this day but their nature has changed rapidly in recent decades and is likely to continue evolving over the coming years.
Back when the World Gold Council was founded, jewellery was a crucial aspect of gold demand, centred definitively in the West. Today, there are considerably more ways to access gold than there were 30 years ago and jewellery demand has shifted East.
Looking ahead, we do not expect a substantial recovery in developedmarket jewellery demand, as historic buyers of large amounts of jewellery are ageing. Young, developed market consumers appear to favour experiences over material possessions and jewellery has struggled as a result of this trend. But developed markets have faced these challenges for some time, and US jewellery demand has actually grown in recent years, suggesting this trend does eventually mature. Looking ahead, we expect jewellery demand will persist in developed markets. The excitement, however, will focus on emerging markets, as developing countries’ economies – and in many cases their populations – grow.
Today, China and India are the largest jewellery-buying nations but they may experience pressures on jewellery demand too, as they develop and age.
We believe, however, that rising incomes, a shift to a more consumption-oriented economy in China and the demographics of India should offset these trends.
In the near term, it may be that Indian gold demand will increase substantially – if the government is successful in its ambition to dramatically increase rural income. But this is likely to moderate in the longer term. There is considerable
potential for recycling some of the approximately 25,000-tonne stock of gold already in India and that may reduce the need for the country to import ever-growing quantities of gold.
The Indian jewellery trade will also become much more organised, with consolidated jewellery manufacturers selling a range of modern and traditional hallmarked pieces to increasingly urbanised and sophisticated consumers. Gold jewellery’s role as a store of wealth will remain, but investment products will become much more prevalent, with jewellery increasingly used for cultural and matrimonial purposes.
In China, traditional 24-carat gold jewellery will become much less common; 18k, 22k and modern 24k jewellery will predominate, and investment in gold via pure but crude jewellery will have ceased, as low mark-up investment bars and savings plans become ubiquitous. There will still be a 24-carat market, however, as China develops its innovative new
design and manufacturing techniques, producing intricate pieces that look solid but are much lighter.
Other emerging markets will become important too. Economic growth in countries such as Vietnam, Indonesia and Cambodia is likely to drive gold demand in south-east Asia, while demand in Africa may increase, if its expected rapid economic development materialises.
One theme that is common to both developed and developing markets, we believe, will be a greater emphasis\ on responsible sourcing of gold. Twin factors are driving this phenomenon. First, we see a concerted effort to eliminate irresponsibly mined gold that has used child or coerced labour, or unsafe environmental or unjust social practices. Second, gold’s potential role in money laundering, smuggling or tax evasion is being addressed by governments and the formal gold ecosystem. Both these factors will see greater efforts by refineries, jewellery fabricators and vault holders to ensure that the gold they deal with and store has the best reputation.
The changes seen in the gold investment market over the past 30 years highlight the challenges associated with forecasting the outlook for this sector. Back in the 1980s and 90s, investment in gold was limited to coins, physical bars and – for the larger buyer – the over- the-counter (OTC) market. The development of physically backed exchange traded funds (ETFs) has revolutionised the investment market, greatly reducing transaction costs for smaller purchases and allowing institutional investors easier and more compliant access to gold. Now, the growth of digital platform and/or fintech-enabled gold trading may be about to deliver another round of radical change.
While investment demand is related to income growth, ( Chart 1) other factors are also at work. In the 1990s and early 2000s, gold fell from favour as an investment asset and demand was dominated by non-investment applications. The shifts that took place after 2008–09 are instructive, as investment demand increased substantially, at the expense of more price-elastic jewellery demand ( Chart 2).
If we return to the non-inflationary, constant expansion (NICE) times of the 1990s and early 2000s, investment demand may revert to a marginal component of the gold market. Yet NICE was a term coined by Mervyn King, then Governor of the Bank of England, during the same era that Gordon Brown, then UK Chancellor of the Exchequer, claimed his prudence would prevent a return to boom and bust economics. Admittedly, Brown was talking only about the UK economy but even so his assertion proved misguided, even hubristic. Now, it seems almost impossible to envisage a NICE 30 years, uninterrupted by boom and bust. Instead, anticipation of – and reaction to – economic downturns and financial crises are likely to buoy investment demand for many years to come.
Other factors are expected to bolster the investment market too, including the elevated valuations of many asset markets, large debt levels in many economies and unresolved structural problems dating from the 2008–09 global financial crisis. There are two further potential drivers of financial crises that we expect to play a role in investment demand for gold over the next 30 years. First, the US will inevitably lose its position as the largest economy to China, although superior demographics may lead India to threaten China's status near the end of this period. This may well incur volatility within currency and asset markets and the associated uncertainty should favour gold. Similarly, we believe that climate change will play an increasing role in the global economy, with the potential for large-scale weatherrelated insurance losses a potential driver of volatility.
Overall, therefore, we believe interest in gold as an investment asset class is likely to increase over the next 30 years, although clearly this will ebb and flow, in line with perceptions of stability and economic growth prospects.
The rise of technology
Gold will almost certainly play a significant role in technology over
Discoveries have been scant; permitting timelines are long; capital costs have ballooned; ESG requirements are becoming more challenging; operating costs have risen; and political risk has increased.
the next 30 years. Rising wealth, connectivity and the use of electronics in ever-expanding applications will require increasing amounts of gold. The perennial trends of thrifting, substitution and recycling will be a drag on growth rates but they are highly unlikely to quash demand completely.
Medical usage of gold in nanoscopic quantities in medicines and health devices is an interesting area of demand but it is unlikely to move the needle substantially. Dental use will probably decline to near-zero, although this has largely occurred already.
Production and supply
30 years' time; indeed, some of the mines in production now will probably still be in operation then. But the challenges that the industry faces – and the associated costs of meeting these challenges – look set to grow.
Gold mine supply will struggle to expand, according to precious metals consultancy Metals Focus. Discoveries have been scant; permitting timelines are long and becoming more extended; capital costs for the next generation of large, low-grade open cast mines have ballooned, perhaps beyond readily fundable levels; environmental, social and governance (ESG) requirements are becoming more challenging; operating costs have risen; and political risk has increased in many prospective regions.
We expect new mine supply to decline over the next 30 years, hit by rising costs. Metals Focus estimates that, even today, new gold mines need a price of about US$1,500/oz, and with costs having increased at a compound annual rate of 10% over the past 15 years, additional ESG costs are likely to mean that even higher gold prices will be required in the future.
Of course, there is always the potential for a major discovery along the lines of the Witwatersrand or Nevada gold deposits but the industry has been looking exhaustively for such deposits with very limited success.
Trading venues and access to the market
Two, perhaps three, major factors are likely to dominate the evolution of gold trading and market access over the next three decades.
First, regulatory changes are afoot in both developed and developing markets. The regulatory response to the global financial crisis is encouraging a migration of activity from the OTC market to more transparent trading venues, including exchanges. Even where OTC trading persists, reporting and central clearing will become more widespread. In developing markets too, regulators are pushing for a formalisation of gold trading towards exchanges, such as in India, and the development of a joined-up gold ecosystem, such as in Russia.
Second, mobile applications that allow individuals to buy, sell, invest and gift gold are developing rapidly in India and China and we expect these applications to become increasingly popular over the coming decades. In China, digital wallets are fast displacing cash in urban areas, and gold is represented on the most important platforms, such as WeChat. In India, gold savings are of particular interest, as most Indian households have a future requirement to give gold as a wedding gift. The ability to buy and accumulate gold via a mobile electronic platform and take delivery at a jewellery store when needed has tremendous potential in India.
These sorts of applications may spur interest in other developing markets too and they may even spread in the developed world, although 'physical' investment seems to dominate these markets today. Yes, ETFs have been increasingly used to facilitate gold investment, but as the German and US markets demonstrate, physical ownership of bars and coins remains an intrinsic part of gold's attraction to many people.
The third possible way that gold investment could change dramatically is through adoption as a crypto asset. There have already been some developments in this area, such as RMG, a blockchain initiative from the UK Royal Mint; InfiniGold, from The Perth Mint; Digital Gold, from TradeWind; and Responsible Gold, from Emergent Technology Holdings. None of these has really taken off so far but we suspect there will be repeated attempts to join gold and blockchain for transaction and investment purposes. If one (or more) is successful, it could be as big a change to the gold markets as the development of ETFs, but with the added advantage of appealing to younger generations too.
Gold: an enduring asset
This report considers how the world – and gold – will develop over the next 30 years. We know that there will be many developments that we have not even considered and our overall optimism for continued economic development and an absence of any major geopolitical conflict may prove overly positive, in light of the challenges the world faces. But assuming we are largely correct, we believe that the gold industry should be alive and well at the end of this period. Gold supply is likely to be somewhat smaller, while jewellery and technology demand will probably have grown in a richer, more middle-class, connected world. Investment demand will see peaks and troughs, but there is enough potential economic risk to keep investors attracted to the merits of gold, following a 5,000-year-old tradition. Excerpted with permission from ‘Gold 2048: The next 30 years for gold’ – a report by World Gold Council
John Reade Head of Research and Chief Market Strategist