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The recent gold rally is counterintuitive because high interest rates tend to make precious metals less attractive.
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But billionaire investor David Einhorn has a theory that he shared in his latest investor letter.
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Einhorn suggests that gold’s rally may be due to countries in the East buying gold from Western countries.
Gold has had a record year so far in 2024.
That said, the commodity’s sudden rise may come as a surprise. That’s because the macro environment was believed to create headwinds for gold’s price appreciation, as the Federal Reserve’s “higher-for-longer” interest rate policy tends to make other investments such as bonds and savings accounts more attractive compared to metal, as it does not provide returns yielding interest. possess.
To explain the strong run on gold, billionaire investor David Einhorn offered a possible theory in his latest letter to investors, published this week.
“While it is possible that the progress was related to the market beginning to doubt the sustainability and wisdom of both monetary and fiscal policies, other indications suggest that this was not the case,” Einhorn said in the letter.
Instead, the founder of Greenlight Capital said there is a “secular trend” of countries in the East buying gold from Western countries.
“The West may be running out of gold it is willing to sell, while demand from the East has remained strong enough to force the price higher,” he said in the statement.
Indeed, according to data from the World Gold Council, global central banks are in a race to buy gold, snapping up more than 1,000 tons of gold in the past two years, and one of the biggest buyers is China.
The world’s second-largest economy has been crippled for years by a sluggish economy, with an ailing real estate sector, a faltering stock market and a persistently high unemployment rate. This has led the central bank and consumers to hoard bullion as a stable store of value and as a way for the People’s Bank of China to diversify its reserves beyond the dollar.
For 17 months in a row, the PBOC has gobbled up gold, increasing its holdings by 16% in that time.
The World Gold Council reveals that India and Singapore have also stockpiled gold to hedge against global economic turbulence.
Rising demand for gold is pushing prices higher, with economists predicting the rally will continue as geopolitical uncertainties and macro hurdles like inflation lead to more gains.
Top economist David Rosenberg predicts another 15% rise in the yellow metal’s price, with a potential of 30% on the table as central banks consider rate cuts, but he stressed that gold could rise regardless of whether the economy ultimately has a soft landing . or a deeper recession.
Market guru Ed Yardeni, meanwhile, predicts that gold could rise to $3,500 next year, suggesting a potential upside of 50%. He draws parallels to the Great Inflation era of the 1970s, suggesting that current inflation trends could push gold to new heights.
Others, like billionaire investor Ray Dalio, say gold can hedge the risks posed by high government debt. In a recent post, he said he owns gold because the risk of a debt or inflation crisis is increasing.
Read the original article on Business Insider
