The gold price has risen by over US100 over the last month (+6.7%). John Maynard Keynes described gold as “a barbarous relic”, but that hasn’t put off investors wanting a bar of it. After trading as high as US$2,068 in August 2020 at the height of pandemic uncertainty, gold fell to a low of US$1,600 in September 2022 – largely a response to US dollar strength as the Fed hiked rates. But now, with the USD weakening and the Fed soon expected to pause in lifting rates, gold is making a comeback.
Gold chart – 5 years
Demand for gold comes from all sorts of sources. Retail investors buy gold as a store of value amidst inflation, Indian consumers buy tons of gold jewellery, institutional investors buy gold-tracking ETFs as part of their asset allocation strategy, while central banks want to diversify their holdings amidst currency and geopolitical uncertainty. The big move in recent months has been by the global central banks, where purchases have leapt to their highest level for 20 years: they bought 400 tonnes of gold in Q3 2022 (speculated to be driven by China and Russia diversifying holdings after western allies froze $300bn of Russia’s foreign currency reserves).
Following the Russian invasion of Ukraine, gold prices surged to an all-time high above US$2,000 in March as investors bought gold as a safe haven asset. That was as gold bugs might have predicted, however as the year wore on and rates rose, gold was sold in favour of high yielding bonds. Gold now trades at about US$1,910, despite the Fed lifting rates from near zero to 4.5%. As gold does not offer a yield, the opportunity cost of buying gold rises when cash or bond yields rise.
What influences the gold price?
Influencing factors are complex, and include Fed rate policy, global real yields, currency volatility, production levels, as well as geopolitical factors such as the war in Ukraine. Perhaps the implosion of crypto currencies has seen more attention given to gold of late. Investors are constantly assessing all these factors, plus many others. It tends to perform during times of financial instability and generally rises during economic downturns, delivering positive returns in five out of the last seven recessions since 1973, including during the GFC in 2008/9 and at the height of the 2020 Covid pandemic shock.
Gold bulls argue that the huge levels of debt worldwide could force central banks to reverse course on monetary policy sooner rather than later, which would be good for gold. Worldwide debt as a ratio to GDP is around 250%, far higher than before 2007 when it was below 200%. In real terms, the all-time high gold price was actually hit in 1980 when it exceeded US$800 – adjusted for the present day value of the US dollar would be close to $2,700. That seems to leave upside for gold prices.
Gold loves uncertainty – something that is hardly missing in the world today.
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