Falling interest rates and increasing geopolitical tensions increase gold’s appeal as a safe haven.
With gold outperforming stock prices since October 2022, Wall Street expects the rally to continue.
The gold price has risen enormously this year.
The precious metal hit a record high of $2,772 per troy ounce this week and has risen in six of the past seven weeks.
With year-to-date gains of about 33%, gold returns have outpaced the broader stock market, including the tech-heavy Nasdaq 100, by about 10 percentage points.
And since the stock bull market began in October 2022, gold has outpaced stock gains, returning 67% compared to the S&P 500’s return of about 63%, according to data from YCharts.
These superior returns make the metal one of the most popular investments in the world.
The largest gold ETF, SPDR Gold Shares, has $78 billion in assets under management and has seen inflows of about $5 billion over the past six months, according to data from ETF.com.
Physical gold is having a moment too. Costco has consistently sold out of its gold bars when they become available on their website, and Wells Fargo estimates that Costco sells up to $200 million worth of gold bars and silver coins to its members every month.
It was a perfect storm for the yellow metal, and the outlook points to even more gains.
This is what’s going on.
Global central banks have been buying gold in recent years.
According to the World Gold Council, central banks bought a record 483 tons of gold in the first half of the year. Central banks from Turkey, India and China topped the list of biggest buyers.
Some of the increase in demand comes from countries looking to diversify their investments away from the US dollar.
“We believe the tripling of central bank purchases since mid-2022, driven by fears of US financial sanctions and US sovereign debt, is structural and will continue,” Goldman Sachs said in a note last month.
This dynamic has been visible since Russia invaded Ukraine in 2022, when America sought to inflict maximum economic damage on Russia through sanctions. But it is more difficult to impose sanctions on a country that is less dependent on the dollar, and one way to become less dependent on the dollar is to buy gold.
According to economist Mohamed El-Erian, it is a dynamic that the US should keep a close eye on.
El-Erian wrote in an op-ed for the FT this week that the continued rise in gold prices “reflects an increasingly persistent behavioral trend among China and ‘middle power countries’.”
“There is also interest in exploring possible alternatives to the dollar-based payment system that has been at the core of the international architecture for some 80 years.”
Russia has had some success with this, having managed to steer its economy out of a full-fledged downturn after the US imposed extensive sanctions in 2022.
Russia’s ability to steer its dedollarized economy away from crisis could give other countries the confidence to reduce their dependence on the dollar, ultimately benefiting gold.
“What is at stake here is not only the erosion of the dollar’s dominant role, but also a gradual change in the functioning of the global system,” El-Erian said. “As it develops deeper roots, it risks materially fragmenting the global system and eroding the international influence of the dollar and the US financial system.
Gold is considered a safe haven because of its long history as a stable store of value.
So when geopolitical tensions rise, investors tend to flock to the shiny metal, and right now there’s no shortage of reasons to worry.
From Russia’s war against Ukraine to escalating conflicts in the Middle East and China’s long-standing threat to Taiwan’s independence, geopolitical tensions are rising, not subsiding.
Moreover, rising US debt means that government bonds – another historical safe haven – may no longer be as risk-free.
“Gold appears to be the last ‘safe haven’, prompting traders, including central banks, to increase their exposure,” according to Bank of America this month in a note.
The Trump trade has picked up steam lately as the former president’s chances of winning the election have risen, and gold has been a big beneficiary.
That’s because a potential Trump presidency is expected to come with a sky-high government deficit and a burgeoning pile of debt, which would further heighten concerns about a rebound in inflation and the sustainability of the U.S. dollar.
“If you’re concerned about fiscal profligacy, financial repression and attacks on Fed independence, gold would be an attractive asset,” economist Davix Oxley of Capital Economics said Friday.
Even if Trump doesn’t win the election, the deficit is likely to widen, leaving gold primed for more gains, said Steve Sosnick, chief strategist at Interactive Brokers.
“Both candidates are not preaching fiscal discipline, and the Fed appears willing to continue cutting spending even if inflation remains slightly above target. So there is the thought that gold could be a viable alternative if interest rates rise and the economy remains healthy. And if the economy is not healthy, it can still be a good store of value,” Sosnick told Business Insider.
According to data from the World Gold Council, falling interest rates have historically been good for gold prices, with the commodity rising as much as 10% in the six months after the Federal Reserve’s first rate cut.
With the Fed expected to cut rates several times in the coming year, lower interest rates should serve as a tailwind for gold prices.
While yields have actually risen since the Fed’s first rate cut last month, with 10-year Treasury yields hitting their highest level since July this week, gold prices have continued to rise.
That’s a sign that gold investors are focusing more on the global yield path, which is pointing downward as global central banks appear ready to ease monetary policy.
The People’s Bank of China cut rates by 25 basis points this week, while the Bank of Canada cut rates by 50 basis points. The European Central Bank cut rates by 25 basis points last week, and economists say they expect the Bank of England to make bigger rate cuts than previously expected by markets.
