But this rapid rise to all-time highs is even more interesting given who did, and didn’t, contribute to the price jump.
Ask investors about gold as an investment, and it’s like conducting a Rorschach test – the psychological appraisal in which people project their unconscious thoughts onto inkblot images. Macro investors will tell you that the gold price rises as real interest rates fall. Meanwhile, others will concentrate on the intricacies of supply and demand.
Gold has been a monetary asset for over 5,000 years; some consensus would have developed during that time.
However, buyers can be motivated by different issues.
International politics
Gold is sometimes considered a haven during times of geopolitical uncertainty. The recent surge in gold prices can be attributed to the growing sophistication of emerging economies and their efforts to minimize risks to their economic prosperity.
Gold as an alternative to the US dollar
Many countries are reducing their foreign exchange reserve holdings of the US dollar and US government bonds. One reason for doing this is to reduce vulnerabilities linked to access to SWIFT, the international money transfer network.2 Western countries can restrict access to SWIFT to enforce economic sanctions and have been doing so since the start of this century.
BRICS expansion3
Six more countries joined the group of emerging market nations last year, and another forty have applied for membership. A bigger BRICS offers a counterbalance to Western influence and reflects the desire for economic power to shift towards other parts of the world.4 China, a key member, wants to see a global financial system that relies less on the US dollar.
Markets, bullion
As the battle against inflation takes a back seat to efforts to achieve full employment, interest rates are falling around the world, and gold looks increasingly attractive:
Interest rates and investor behavior
Gold does not pay dividends or interest. An opportunity cost to holding gold makes it vulnerable to changes in real interest rates (rates adjusted for inflation). Over the past two years, investors sold more than 810 tons of gold as real interest rates rose.5 But when real interest rates fall, gold becomes more attractive.
The US Federal Reserve (Fed) finally cut a key interest rate by 50 basis points last month to join central banks in easing monetary policy in Europe, the UK, and China.6 Investors have just begun to add more gold to their portfolios from very low levels. Investments in exchange-traded gold funds (ETFs) picked up in June – equivalent to some 2.5 million troy ounces between May 28 and September 19 – in anticipation of the Fed cut (Chart 1).7
Chart 1. Gold price vs. known gold ETF holdings
Source: Bloomberg, September 2024.
During the last three rate-cutting cycles in the US, gold rose 57%, 235%, and 69%, respectively, starting in 2000, 2006, and 2018.8 A pickup in investor demand largely drove these increases, which are critical to the future gold outlook.
Official sector purchases
Following the 2007-2008 global financial crisis, the Bank of International Settlements, as part of the Basel III regulatory framework, allowed banks to count 100% of gold's market value on their balance sheet (up from a 50% allowance).
This enabled banks, especially central banks and national treasuries, to accumulate larger amounts of gold more easily. In the roughly 24 months to December 2023, official sector purchases of physical gold totaled some 2,100 tons.5 2022 and 2023 were the number one and two biggest years for such buyers' purchases of bullion. These purchases look set to continue.
Economic strength, weakness
Two of the biggest economic success stories of recent decades have been China and India. The rise of the middle class in both countries has boosted the spending power of people keen to flex their newfound economic muscle.
Consumers in both countries value the yellow metal as a store of value – an integral component of household wealth – and as a customary gift at landmark events, such as the birth of children and weddings. Gold is especially prized during times of uncertainty:
Retail demand
In Western cultures, jewelry is typically prized for its aesthetic appeal. However, in India and China, gold is often purchased as a store of value to be kept in a safety deposit box. That’s why the two countries’ jewelry purchases can account for up to a quarter of the global demand for gold.
Most recently, India's decision to cut taxes on gold to 10-year lows may boost retail demand there. Chinese consumers, faced with falling property prices and limited places to park their money, have also turned to the yellow metal in greater numbers.
Final thoughts
The price of gold has been on a tear, lifted by strong demand for the physical metal by central banks. But now, demand is set to rise in India due to lower import duties, while global investor demand for gold has historically risen after interest rate cuts. As countries diversify even slightly away from US dollar assets, central banks increase their gold reserves, and investors respond to changing interest rates – demand for gold will likely remain strong for some time.
1 Equivalent of 31.1034768 grams, the troy ounce is to this day the standard unit of measurement in the precious metals market to ensure purity standards.
2 "What is a SWIFT Transfer?" MoneyTransfers.com, May 2024. https://moneytransfers.com/swift-codes/what-is-swift-transfer.
3 Brazil, Russia, India and China. Many believe China is likely to become the world’s leading supplier of manufactured goods, India the leading supplier of services, and Brazil and Russia dominant as raw materials suppliers.
4 "BRICS Expansion, the G20, and the Future of World Order." Carnegie Endowment for International Peace, October 2024. https://carnegieendowment.org/research/2024/10/brics-summit-emerging-middle-powers-g7-g20?lang=en.
5 "Gold prices keep breaking records in 2024. Central banks are driving the rally." MarketWatch, August 2024. https://www.msn.com/en-us/money/markets/gold-prices-keep-breaking-records-in-2024-central-banks-are-driving-the-rally/ar-AA1oVUGA?ocid.
6 Federal Reserve is the central bank of the United States which sets policy interest rates.
7 Bloomberg data ETF holdings of gold in ounces 5/28/2024–9/19/2024.
8 Bloomberg gold price returns 5/25/2000–3/31/2004, 6/19/2006–8/22/2011, and 11/30/2018–8/6/2020.
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 does not guarantee future results.
Trading in commodities entails a substantial risk of loss. Commodities generally are volatile and are not suitable for all investors. The commodities markets and the prices of various commodities may fluctuate widely based on a variety of factors.
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Projections are offered as opinion and are not reflective of potential performance.
Projections are not guaranteed, and actual events or results may differ materially.
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