Since the outbreak of conflict in the Middle East and disruptions to global maritime trade through the Red Sea, gold prices have advanced. Previously, gold had rallied in the face of higher US real interest rates and a stronger US dollar. Should one still invest in gold in 2024?
The appeal of gold is often questioned as it is an asset that pays no dividend (unlike equities), no coupons (unlike bonds), and no rent (unlike real estate). Nonetheless, as a financial asset, gold can benefit from fundamental, economic and geopolitical factors that are particularly important in troubled times. The recent imbalance between supply and demand has provided further support.
Gold is a real asset that has historically acted as a safe haven in times of crisis. Central banks also see it as a defensive asset. It can be a hedge against an increase in inflation, particularly when inflation reaches high levels.
Source: World Gold Council
Historically, gold has been an asset that is inversely correlated with real rates. Gold becomes less attractive as real interest rates rise because the opportunity cost of holding an asset with no yield goes up. Over the last 18 months, however, this inverse correlation has broken down. As real rates rose to a high of 2.5% in October 2023, gold prices also generally rose.
Source: BNP Paribas
Another economic factor influencing gold prices is the US dollar – gold tends to advance when the dollar falls: the reference price of gold is denominated in dollars. All else being equal, if the dollar appreciates, the amount of dollars needed to buy the same amount of gold decreases and the price of gold falls.
As a result, demand for gold increases when the dollar falls as it makes it cheaper for major jewellery buyers in countries such as India or China to purchase the metal.
Source: BNP Paribas
While gold does not generate income, it can be valuable when purchasing power declines. It can therefore be a good asset for diversifying a portfolio at a time when bonds don’t really fulfil this role. It can help minimise the impact of crises and peaks in inflation thanks to its status as a safe haven and as a central bank ‘reserve’ asset.
Gold has been benefiting from the gradual normalisation of real rates and has been supported by the growing appetite of central banks. Strong demand while supply is limited is yet another factor in gold’s favour.
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