In Gold We Trust (IGWT) conducts an annual comprehensive macroeconomic analysis and examines past trends, the present and what effect this will have on the future of the gold price. The report pays attention to key issues in the financial world every year. The preview chartbook on IGWT's report to be released in May this year states that the gold price could rise further due to macroeconomic factors.
 

Inflation

According to the IGWT report, there are several reasons for the high inflation of the past year. Not only because of geopolitical relations that came under pressure, globalisation also caused higher prices. Since the corona pandemic, there has been an emphasis on shorter supply chains and that transition has been accompanied by higher costs.
 
In 2021, there was a smooth demand recovery for (consumer) goods, mainly because the lockdowns caused demand for services such as hospitality and travel to stagnate and money was saved, but the supply recovery lagged. Once the recovery was underway in 2022, the war in Ukraine started on 24 February, again disrupting supply chains. Temporary renewed corona lockdowns in China also caused disruptions in production and international transport. Energy prices rose sharply and both consumer and producer confidence were on a downward trend. The ECB's rapid rate hikes in 2023 to curb inflation put pressure on consumer spending. These are tempered by substantial purchasing power adjustments due to high energy prices in 2022.
 
In addition, the energy transition is driving up prices. The accelerated transition to renewable energy is a cost that will continue. In addition, the Dutch government is coming up with a €17 billion purchasing power package, while the Dutch economy is already overheated. Governments in other countries are also more than compensating for the loss of purchasing power, many countries are facing budget deficits as a result. The Netherlands remains within the EU norm of 3% this year, but Italy's budget deficit is 4.5% and France also came up short last year. In addition, the Chinese economy is expected to recover now that corona measures are being loosened, which could also start to have a price-driving effect for the period ahead.
 
 
Finally, higher prices create higher wage demands, threatening a wage-price spiral, according to the IGWT report. What is striking in the preview chartbook is that IGWT does not yet mention central banks' expansionary monetary policies in it. Despite that, analysts think gold is in for a good time due to the current high inflation rate, as gold has traditionally been seen as a store of value.
 

High inflation continues

Since the 1980s, we have seen a downward trend in inflation rates. Central banks even struggled to get inflation up in recent years and feared deflation. Therefore, the high inflation rates of recent years are a trend reversal and may mark the end of an era.
 

 
The past shows that a fierce inflation wave in the past has been followed by a second, even fiercer inflation wave. IGWT's report compares the inflation of the current period running from 2013 with the period between 1966 and 1983, which also saw high inflation. The line of current inflation is almost similar to the course of inflation in the 1960s and 1970s. IGWT's report shows that it is therefore not yet possible to say whether declining trend in the current inflation is also continuing, or whether a second wave of inflation is on the way like in the 1970s and 1980s.
 

 
IGWT expects inflation to remain well above the 2% inflation target for some time to come, as core inflation has not yet started to fall. It already stood at 5.6% in the Eurozone for the month of February. High energy prices are seeping into the prices of other products and services. IGWT compares this development to inflation in the 1970s.
 

Tight monetary policy

We are currently struggling with high inflation, but there is no recession. In the last quarter of 2022, the Dutch economy actually grew by 0.6%. People speak of a recession after two quarters of negative growth figures, but that recession has so far failed to materialise.
 
ABN-AMRO's forecast shows that growth is still expected for 2023 and 2024. IGWT takes a less positive view of this, according to the report, most of the periods in which interest rates were raised have been followed by recession. Between the period 1915 and 2023, only 3 of the 20 rate hikes (periods when interest rates were raised) were not followed by a crisis.
 

Fast rate hike

The Fed's policy interest rate has increased relatively quickly over the past year. The European Central Bank could not raise interest rates as fast, this is because in Europe, interest rate differentials between member states had widened faster due to the large debt burden in southern Eurozone countries in particular.
 

 
The consequence of this rapid interest rate hike in America was already causing major problems in the banking sector. Due to the interest rate hike, bonds held by the bank quickly became worth less. As market interest rates rose and more money flowed away into money market funds and other investments, the banks ran into liquidity problems resulting in selling bonds at a loss. These problems already led to the failure of Silicon Valley Bank, the biggest bank failure since the 2008 banking crisis. But Credit Suisse also collapsed in Europe after it ran into trouble.
 
Central banks will make losses in the coming years due to rising interest rates. The Dutch Central Bank (DNB) already recorded a loss of 460 million euros in 2022. According to DNB's calculations, these losses will persist through 2027. Once profits return, DNB will need another five to six years to build up a new buffer. This means that the State will receive no dividend for at least 12 years, adding up to a loss for the government of around 10 billion euros, DNB's calculation shows. In recent years, the Ministry of Finance received an annual profit distribution from DNB. Since the introduction of the euro in 1999, the average annual dividend to the State has been 800 million euros.
 
In addition, private parties may also suffer from these high interest rates. Not only does it make banks where they deposit their money more vulnerable, mortgage payments are also rising as interest rates in the market are going up. In US households, the average mortgage payment increased rapidly and saw a 100% increase in the past two years. This has also been felt in the Netherlands and Dutch people are currently paying much more when taking out a new loan.
 

US economy falters

In America, overall confidence in the economy is falling sharply. The number of people being laid off is rising sharply and the number of new manufacturing orders is falling, a sign that confidence in the economy is waning.
 

 
In addition, the report writes that the US economy is becoming increasingly isolated. For instance, world trade increased tremendously after World War II, while it has been increasingly declining in recent years. The United States notices this particularly in trade with China, which is declining due to the trade war.
 

The dollar

The gold price was already rising during the 2008 crisis, but the banking crisis also pushed the gold price to its highest level in 11 months. In America, there is also currently turmoil over the dollar. For instance, Brazil and China have agreed to bypass the US dollar in payments for trade goods. Chinese authorities shocked by the Russian Central Bank's seizure of foreign exchange reserves following the invasion of Ukraine. In the event of a Sino-American conflict, Chinese assets would be vulnerable.
 
In addition, Russia turns to the Chinese yuan as its preferred foreign currency and supports it in trade with other countries. Since being excluded from much of the global financial system, Russia has sought alternatives to mitigate the effects of Western sanctions. The United States' two biggest geopolitical rivals want to counterbalance the dominance of the dollar globally in this way.
 

Gold

The report also lists the countries that own gold and products. For instance, the West still holds by far the most gold. The share of gold held by the Shanghai Cooperation Organisation (SCO), an alliance including India, China and Russia, has been increasing in recent years, but the West owns roughly three times as much gold as the SCO.
 
In addition, the SCO is also the largest producer of gold. One of the largest gold mines in the world is currently in Russia. In addition, the populations of countries within the SCO also buy more gold than Western countries. Since Russia invaded Ukraine, Russians bought gold en masse, especially when VAT on gold was abolished in Russia.
 
Although central banks sold gold en masse between 1990 and 2010, they have been adding gold to their reserves for years.
 

 
Russia, China, India and Turkey have been the biggest buyers of gold in recent years. The image below shows that Russia had the biggest increase, the Russian Central Bank's gold supply increased by a whopping 1848.2 tonnes from 2008 to 2022.
 

Change in central bank gold reserves between 2008 and 2022 (Source: World Gold Council)
 
Gold has been accepted as a means of payment for centuries and is also considered a store of value. Gold also has no counterparty risk. We have seen gold purchases by central banks increase substantially over the past decade due to geopolitical turmoil. Gold purchases even peaked in 2022.
 

 
Compared to currencies and equities, gold has remained strong. It is seen as a safe investment because of its low volatility. Gold will not fall or rise in value very quickly, this makes gold attractive in times of uncertainty and inflation due to its stability in value. When comparing the gold price to the US dollar or Japanese yen, one notices that gold has generally appreciated in value. Gold is also doing well compared to the stock market over the past year, the charts below from IGWT confirm this picture.
 
How the price develops in the coming years is difficult to predict, but according to the IGWT, the outlook could be promising for the gold price.
 

 
Disclaimer: The Silver Mountain does not provide investment advice and therefore this article should not be considered as such. Past results do not guarantee future results.