GOLD AS AN INVESTMENT ASSET: INFLUENCING FACTORS ON MARKET VALUE DYNAMICS

Abstract

Over the past 10 years, the price of physical gold has increased by 17%, which is equivalent to 1.6% per annum for long-term investors. However, rapid growth was seen only in the last 5 years (by +55% or 8.8% p.a.). Historically, gold prices have grown at a rate of 7.8% p.a. from 1971 to 2022 inclusively. By gold growth rate, it holds the highest investment asset rank after only real estate, and stock markets in the US and other developed countries. In the current study, we analyzed the main factors influencing the performance of gold prices. We critically overviewed the common hypotheses regarding the protection of gold from inflation, economic crises, and the reliability of the precious metal in global geopolitical tensions’ periods. We have recognized that external factors – the inflation rates in the world, the economic cycle stage, the US dollar performance, or geopolitical risks – play greater role in shaping trends of physical gold prices than direct factors (the demand of the jewelry industry, the cost of gold production and margins in gold mining). The main scenario for the global economy in 2023-2024 is stagflation. Weak economic growth with moderate inflation and unemployment benefits central banks, which can continue to keep interest rates high and withdraw excess liquidity from the financial system. In such periods, gold performance is positive historically. A combination of other factors also indicates the high potential of holding gold in an investment portfolio. As the results of our research, we have defined the follows: a) the jewelry market, that is the largest segment in terms of volume and money in the gold demand structure, is mainly neutral to the market value of gold; b) the current monetary policy globally focuses on increasing interest rates, which leads to a raise in real rates in the medium term – this has a negative impact on the value of the precious metal; c) as we expect a further decrease in the DXY index – this is a positive factor for the market value of gold; d) we defined that gold has a fundamental price floor that tends to rise due to high oil prices and global inflation, in the long run, the cost of mining will certainly rise due to new climate regulations and the necessity of capital expenditures, equipment modernization, labor cost increase, etc.; e) the increasing demand from central banks to buy gold is positive factor, gold will probably gain further acceptance as a reserve currency and as an anchor of confidence and purchasing power.