Central banks continued to stock up on gold last year, and total demand for the precious metal shone brighter than ever. Let’s look at why this time-tested trend might last.

What’s going on with gold?

Total global demand for gold rose by 3% in 2023 to hit a record 4,899 metric tons. That figure includes demand from central banks, investors, manufacturers, and over-the-counter purchases (think the super-rich, sovereign wealth funds, and the futures market).

All that buying sent the price of gold 13% higher last year, to a record high in December, despite significantly higher bond yields. And that’s striking: investors tend to favour bonds over gold when yields are high, for the simple fact that bonds generate income and gold doesn’t. That’s exactly what happened last year, with investor demand for gold plunging to a ten-year low.

Offsetting that weakness was blistering central bank buying, coupled with strong demand in China. Gold’s allure among central banks in recent years comes as countries seek to hedge against inflation and diversify their reserves.

As an investor, what does this mean for me?

Gold can shine as a diversifying asset: the returns for our General Investing portfolios last year showcase this. And that means its demand isn’t likely to fall out of fashion this year. Gold’s got a reputation as a safe-haven asset, and a particular appeal when interest rates come down – benefiting from lower bond yields and a weaker US dollar.

The World Gold Council sees total global demand for the precious metal climbing again in 2024, with geopolitical tensions on the rise and the US expected to start cutting interest rates. If you’re interested in adding some shine to your portfolio, here’s our guide on investing in gold.

📰 In Other News: Deflation (not inflation) is China’s concern

While much of the world contends with overly hot inflation, China is struggling with the opposite problem: deflation. The most recent report showed consumer prices fell by 0.8% in January from a year ago – the biggest drop in almost 15 years.

Prolonged deflation – as a result of weak domestic demand, an ongoing property crisis, and falling exports – is becoming a growing worry for China. That’s because the situation could lead to a downward spiral of economic activity (our Simply Finance section below breaks this down).

A cycle of deflation is tough to reverse – that’s why the Chinese central bank has said that fighting deflation is at the top of its to-do list. Pundits say it’ll take more aggressive stimulus measures to beef up demand and confidence.

There is a silver lining (for the global economy, at least): China’s deflation could push down inflation rates in other parts of the world, with lower prices on Chinese goods. If China does end up exporting its deflation to the rest of the world, that could hasten central banks’ decisions to begin cutting interest rates.

These articles were written in collaboration with Finimize.

🎓 Simply Finance: Deflation

Deflation is the opposite of inflation – it's when prices fall over time. While that might sound good at first (who doesn't love a bargain?), it can actually wreak havoc on an economy.

With deflation, businesses struggle as people put off their purchases, expecting prices to fall further. That leads to job losses, wage cuts, and an overall economic slowdown. And while central banks can ratchet up interest rates to deal with inflation, deflation is trickier to deal with. In short, deflation isn't just about cheaper stuff – it's a warning sign for economic trouble ahead.

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