Gold’s price strength started in 2022, reaching several all-time high prices so far this year. But the more interesting story isn’t the price, but what has and has not been contributing to the all-time high prices.
Our in-house expert takes on some of the biggest questions on investors' minds.
What is driving the price of gold higher?
Weakening economic data gives the Federal Reserve (FED) all the confirmation they may need to cut policy rates at the September FOMC meeting.2,3 Several strategists have commented that the Fed will likely close due to a policy error of waiting too long to cut rates.
Several companies have reported earnings indicating that US consumers may suffer economic strain. Walmart sales were helped by high-income households 'shopping down,' which more than made up for the drop in low- and middle-income household purchases.4 Even Lamb Weston, an American food processing company for restaurants and supermarkets, shows a limit to what consumers will pay, confirmed by restaurant foot traffic.5
Excess consumer savings hit a high of $2.1 trillion in August 2021 but completely evaporated by March 2024.6 In-home food prices have been up 26% since 2019, but income has not.7 Automobile prices and auto loan rates are very high, and the average monthly payment for a new car is $735. Credit cards charge the prime rate plus 1300 basis points, up from 500 basis points (bps) in 2007.8
There is still a chance of an economic soft landing because of the massive equity market appreciation since 2019. The S&P 500 is up 86% since 12/31/2019, or up 170% off the 2020 lows.9,10
What happens next?
It appears as if the Fed will most likely cut rates by 25 bps in September, maybe even 50 bps.11 Historically, rate cuts are unsuitable for stocks initially because they signal a weak economy.
Discounting is heavy in restaurants via meal deals; auto dealerships' average discount is $3,383, up 59% from a year ago.12,13 Retailers like Walmart have cut prices on 7,200 products, and Target, Walgreens, Aldi, and Ikea have followed suit.14
We believe a September rate cut would kick off an unknown duration and depth cycle.
What does that mean for gold?
A gold bull market started the last three times we were in a rate-cut cycle. Technically, the bull market begins after the Fed signals it has raised rates the last time, and the market starts to price in some probability of the following moves, so this cycle started in August 2023.
However, the previous three rate-cut cycles led to a 57% rise in gold after the hiking cycle turned in 2000 – a 235% rise after 2006 and a 69% rise after 2018.15 In 2023, gold is up 22%.16
Is there any upside left in the gold bull market?
Exchange-traded fund (ETF) investors sold 795 tons of gold over the last two years, bringing the number of ounces held back to 2019 levels.17 It is as if no government overspending occurred during COVID.
The two-year-long trend of ETF investors selling turned into minimal purchases at the end of June but only retraced 7% of the sales over the last two and a half years.18 ETF investors typically increase their demand when they see an imminent rate cut, so there may be an increase in demand from these investors.
How did gold rise to all-time highs if ETF investors sold 795 tons of gold over the last two years?
ETF investors are only part of the story. Over the same time period, central banks around the world bought almost three times more gold than ETF investors sold. In 2022 and 2023, foreign central banks and treasuries bought 1082 and 1037 tons of gold, respectively.19
Will central bank purchases continue?
US foreign policy under Presidents Bush, Obama, Trump, and Biden have used the SWIFT electronic system and the US dollar’s status as a global reserve currency to enforce US foreign policy. 20
Emerging countries wish to reduce the risk of sanctions by selling some US dollars and US treasuries to buy gold. At these levels, this is not a big deal for either US dollars or the US Treasury market, but it is a big deal for gold. Emerging market countries have only 6% of their foreign exchange reserves in gold, while developed countries have an average of 12%.21
There are plenty of geopolitical reasons for emerging countries to continue gold purchases, and this can be seen in the massive increase in applications for BRICS memberships, where 40 countries applied at the last meeting in August 2023.22
Can supply growth offset the growth in gold demand?
Higher prices can provide a stiff incentive to trade in gold jewelry, increasing scrap supply. However, mine supply has not been raised so quickly.
The recent pickup in merger and acquisition activity in gold mining companies shows the industry prefers to 'buy' supply growth from competitors rather than develop new sources organically.23
Are ETF investors typically small retail customers?
ETFs attract a wide range of investors, from smaller clients to larger institutions. Contracting with a vault to store gold and verify that it is insured, audited, and easily tradable without a punitive transaction cost through physical gold brokers can be costly and time-consuming.
The vast liquidity offered by today's ETFs and the quality standards of the London Bullion Market Association also provide assurances above those of holding physical gold in your hometown bank vault.24
1 As of 8/16/2024.
2 The FOMC is the Federal Open Market Committee where the Federal Reserve sets interest rate policy.
3 The Federal Reserve Bank is the central bank of the United States.
4 "Rich people are going to Walmart more—and they’re a key reason for the company’s recent success." Fortune, August 2024. https://fortune.com/2024/08/15/walmart-earnings-high-income-rich-consumer-spending-sales/.
5 "Lamb Weston’s stock dives as fewer people go to restaurants, buy frozen potatoes." MarketWatch, July 2024. https://www.marketwatch.com/story/lamb-westons-stock-plunges-after-earnings-miss-as-restaurant-traffic-and-frozen-potato-demand-slowed-5bd67ffe.
6 "Pandemic Savings Are Gone: What’s Next for U.S. Consumers?" Federal Reserve Bank of San Francisco, May 2024. https://www.frbsf.org/research-and-insights/blog/sf-fed-blog/2024/05/03/pandemic-savings-are-gone-whats-next-for-us-consumers/.
7 "Kamala Harris Wants to Ban Price Gouging. What Do Economists Say?" The Wall Street Journal, August 2024. https://www.wsj.com/economy/consumers/kamala-harris-wants-to-ban-price-gouging-what-do-economists-say-690ef7e6.
8 Bloomberg data Commercial Bank credit cards minus Bank Prime Loan Rate 1/1/2007 and 8/22/2024.
9 S&P 500 is a stock index that tracks the 500 largest public companies in the United States.
10 Bloomberg data S&P 500 12/31/2019–8/23/2024, and 3/23/2020–8/23/2024.
11 "Interest rate cuts are now all but guaranteed after dovish Fed meeting, experts say." Fortune, August 2024. https://fortune.com/2024/08/21/interest-rate-cuts-all-but-guaranteed-fed-meeting-experts/.
12 "New-Vehicle Sales Incentives Climb Higher in July, According to Kelley Blue Book Estimates." Cox Automotive, August 2024. https://www.coxautoinc.com/market-insights/july-2024-atp-report/.
13 "Value wars: Denny's, IHOP relaunch popular deals to lure customers away from rivals." Local12 News, August 2024. https://local12.com/news/....
14 "Walmart slashes prices on thousands of fan-favorite items to stay competitive with Target and Walgreens." Microsoft Start, August 2024. https://www.msn.com/en-us/money/companies/walmart-slashes-prices-on-thousands-of-fan-favorite-items-to-stay-competitive-with-target-and-walgreens/ar-AA1ppvsF.
15 Bloomberg data gold price, 1/16/2000–4/4/2024. Gold price gain 5/25/2000–3/31/2004; 6/19/2006–8/22/2011; 11/30/2018–8/6/2020.
16 Bloomberg data gold price from 12/31/2023–8/23/2024.
17 Bloomberg data ETF investors ounces of gold 4/2/2022–6/30/2024.
18 Bloomberg data ETF investors ounces of gold 6/30/2024–8/23/2024.
19 2024 Central Bank Gold Reserves Survey. World Gold Council, June 2024. https://www.gold.org/goldhub/data/2024-central-bank-gold-reserves-survey.
20 The Society for Worldwide Interbank Financial Telecommunications (SWIFT) system powers most international money and security transfers. SWIFT is a vast messaging network financial institutions use to quickly, accurately, and securely send and receive information, such as money transfer instructions.
21 "China Gold Buying Slows as Reserves Grow for 18th Straight Month." Bloomberg, May 2024. https://www.bloomberg.com/news/articles/2024-05-07/china-s-gold-buying-spree-extends-to-18th-straight-month.
22 "What is BRICS, which countries want to join and why?" Reuters, August 2024. https://www.reuters.com/world/what-is-brics-who-are-its-members-2023-08-21/.
23 "Gold Mining M&A Heats Up As Rising Metal Prices Boost Cash (CORRECTED)." Benzinga, August 2024. https://www.benzinga.com/m-a/24/08/40424535/gold-mining-m-a-heats-up-as-rising-metal-prices-boost-cash.
24 The London Bullion Market Association (LBMA) which is an international trade organization representing the global over the counter bullion market comprised of approximately 150 firms globally.
Companies mentioned for illustrative purposes only and should not be taken as a recommendation to buy or sell any security.
Important information
The statements and opinions expressed are those of the author and are as of the date of this report. All information is historical and not indicative of future results and subject to change. Reader should not assume that an investment in any securities and/or precious metals mentioned was or would be profitable in the future. This information is not a recommendation to buy or sell. Past performance is not a guide to future results.
The abrdn Gold ETF Trust is not an investment company registered under the Investment Company Act of 1940 or a commodity pool for purposes of the Commodity Exchange Act. Shares of the Trust are not subject to the same regulatory requirements as mutual funds. This investment is not suitable for all investors. Trusts focusing on a single commodity generally experience greater volatility.
Commodities generally are volatile and are not suitable for all investors. Please refer to the prospectus for complete information regarding all risks associated with the Trust.
The value of the Shares relates directly to the value of the precious metal held by the Trust and fluctuations in the price could materially adversely affect investment in the Shares. Several factors may affect the price of precious metals, including: A change in economic conditions, such as a recession, can adversely affect the price of the precious metal held by the Trust. Some metals are used in a wide range of industrial applications, and an economic downturn could have a negative impact on its demand and, consequently, its price and the price of the Shares; Investors’ expectations with respect to the rate of inflation; currency exchange rates; interest rates; Investment and trading activities of hedge funds and commodity funds; and global or regional political, economic or financial events and situations. Should there be an increase in the level of hedge activity of the precious metal held by the Trust or producing companies, it could cause a decline in world precious metal prices, adversely affecting the price of the shares. Should there be an increase in the level of hedge activity of the precious metal held by the Trust or producing companies, it could cause a decline in world precious metal prices, adversely affecting the price of the shares.
Also, should the speculative community take a negative view towards the precious metal held by the Trust, it could cause a decline in prices, negatively impacting the price of the shares. There is a risk that part or all of the Trusts’ physical precious metal could be lost, damaged or stolen. Failure by the custodian or sub-Custodian to exercise due care in the safekeeping of the precious metal held by the Trust could result in a loss to the Trust.
The Trust will not insure its precious metals and shareholders cannot be assured that the custodian will maintain adequate insurance or any insurance with respect to the precious metals held by the custodian on behalf of the Trust. Consequently, a loss may be suffered with respect to the precious metal that is not covered by insurance.
Diversification does not eliminate the risk of experiencing investment losses.
Investors buy and sell shares on a secondary market (i.e., not directly from Trusts). Only market makers or “authorized participants” may trade directly with the Trusts, typically in blocks of 12.5k to 100k shares.
This material must be accompanied or preceded by the prospectus. Carefully consider the Trust’s investment objectives, risk factors, and fees and expenses before investing. To view the prospectus, please click here – abrdn Gold ETF Trust.
ALPS Distributors, Inc. is the marketing agent for the abrdn Gold ETF Trust.
THE LBMA GOLD PRICE, WHICH IS ADMINISTERED AND PUBLISHED BY ICE BENCHMARK ADMINISTRATION LIMITED (IBA), SERVES AS, OR AS PART OF, AN INPUT OR UNDERLYING REFERENCE FOR THE TRUST.
THE LBMA GOLD PRICE IS A TRADEMARK OF PRECIOUS METALS PRICES LIMITED AND IS LICENSED TO IBA AS THE ADMINISTRATOR OF THE LBMA GOLD PRICE. IBA IS A TRADEMARK OF IBA AND/OR ITS AFFILIATES. THE LBMA GOLD PRICE AM, LBMA GOLD PRICE PM, AND THE TRADEMARKS LBMA GOLD PRICE AND IBA, ARE USED BY THE SPONSOR WITH PERMISSION UNDER LICENCE BY IBA.
IBA AND ITS AFFILIATES MAKE NO CLAIM, PREDICATION, WARRANTY OR REPRESENTATION WHATSOEVER, EXPRESS OR IMPLIED, AS TO THE RESULTS TO BE OBTAINED FROM ANY USE OF THE LBMA GOLD PRICE OR THE APPROPRIATENESS OR SUITABILITY OF THE LBMA GOLD PRICE FOR ANY PARTICULAR PURPOSE TO WHICH IT MIGHT BE PUT, INCLUDING WITH RESPECT TO THE TRUST. TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ALL IMPLIED TERMS, CONDITIONS AND WARRANTIES, INCLUDING, WITHOUT LIMITATION, AS TO QUALITY, MERCHANTABILITY, FITNESS FOR PURPOSE, TITLE OR NON-INFRINGEMENT, IN RELATION TO THE LBMA GOLD PRICE, ARE HEREBY EXCLUDED, AND NONE OF IBA OR ANY OF ITS AFFILIATES WILL BE LIABLE IN CONTRACT OR TORT (INCLUDING NEGLIGENCE), FOR BREACH OF STATUTORY DUTY OR NUISANCE, OR UNDER ANTITRUST LAWS OR OTHERWISE, IN RESPECT OF ANY INACCURACIES, ERRORS, OMISSIONS, DELAYS, FAILURES, CESSATIONS OR CHANGES (MATERIAL OR OTHERWISE) IN THE LBMA GOLD PRICE OR FOR ANY DAMAGE, EXPENSE OR OTHER LOSS (WHETHER DIRECT OR INDIRECT) YOU MAY SUFFER ARISING OUT OF OR IN CONNECTION WITH THE LBMA GOLD PRICE OR ANY RELIANCE YOU MAY PLACE UPON IT.
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