Es­say.

FICCI Business Digest - - News -

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.

Jew­ellery de­mand

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.

In­vest­ment de­mand

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

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