[LONDON] The big question facing gold buffs around the world these days is whether Israel’s retaliation against Hamas’ terrorist attacks will continue to underpin gold.

Gold was up 0.5 per cent at US$1,882 an ounce on Thursday (Oct 12), its highest level in two weeks and higher than US$1,811 an ounce when the war broke out last weekend.

In the short term, dealers said high bond yields and the ongoing Israel-Hamas conflict should keep gold within a trading range of US$1,830 to US$1,870 an ounce.

Many investors, however, are focusing their attention on prospects for 2024 and the year after. Analysts are wondering whether a flight to safe-haven investments implies that the bottom for gold this year will be March’s nadir of US$1,804 an ounce and if the metal will ever reach the May 2023 peak of US$2,083.

The key negative factors against gold during a highly volatile year have been the strengthening US dollar and a steep rise in interest rates.

Government bond yields have risen above 5 per cent while corporate bond yields currently range between 6 per cent and 9 per cent. The result has been a shift from gold (which has zero income) to money market funds, bonds and equities with solid dividends.

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“Gold’s downdraft in September and early October was largely the result of higher opportunity costs. For example, the US treasury 10-year bond yield gained almost 50 basis points to about 5 per cent,” said the World Gold Council (WGC) in a recent report.

The council, which monitors gold for miners, noted that there were outflows of 59 tonnes from global gold exchange traded funds (ETFs) in September, when prices tumbled to US$1,811 an ounce.

The downward draft blew harder when hedge and commodity funds dumped 70 tonnes of gold futures and options on Comex, the US commodities exchange.

Total ETF outflows in the first three quarters of 2023 amounted to 189 tonnes. By the end of September, the global total had contracted by 632 tonnes to 3,282 tonnes.

Analysts cited another factor that has had a negative impact on gold prices – the slump in diamond prices. Jewellery consumption accounts for the biggest proportion of annual gold demand, but investment and speculative purchases have caused the steep upward and downward price fluctuations.

Jeffrey Christian, the chief executive of metals consultant CPM Group, expects precious metals jewellery demand to increase ahead of the upcoming Christmas and Chinese New Year festive seasons.

“Gold could retreat again if the Israel-Hamas conflict doesn’t escalate into a prolonged battle that could directly draw in Iran and cause further Middle East turmoil,” he said.

Over the medium and longer term, however, Christian said he remains bullish about the prospects for gold and silver. He is expecting a global recession next year, which would bring in its wake lower interest rates and a weaker US dollar, which in turn should boost gold prices.

Tiffany Wilding, a managing director and economist at asset manager Pimco, agreed that the current high bond yields are “not necessarily sustainable for the economy over the medium term”.

“Higher rates have further tightened financial conditions, which should weigh on investment, real GDP growth, and eventually inflation,” she said.

These are the financial conditions that would lead to a decline in yields, backing Christian’s view that gold prices could recover and potentially exceed gold’s peak of almost US$2,100 an ounce.

Central bank gold purchases will also ensure that any significant fall in prices will be limited.

The WGC reported that central banks bought 77 tonnes of gold in August, an increase of 38 per cent compared with purchases in July. The council noted that during the three months ended September, central banks bought 219 tonnes of gold out of a nine-month total of 463 tonnes.

Krishan Gopaul, a senior analyst at the WGC, noted that since November 2022, the People’s Bank of China has increased its gold reserves by 217 tonnes to a total of 2,165 tonnes. China watchers, however, have long said that these official figures are probably a vast underestimate of the country’s total bullion holdings.

“Some see gold as an inert, useless lump. We see it as insurance against central banks’ mistakes,” said Russ Mould, investment director at AJ Bell, a financial services company.

“America’s tendency to spend like a drunken sailor at a time when interest rates and bond yields are soaring is reason for gold bugs to continue to champion the precious metal,” he added.