Gold has been on a tear for some time now, hitting all-time highs repeatedly over the last year, the most recent in mid-July. So far in 2024, the gold price has risen over 20%, adding to the 15% rise in 2023. Each time one driver falls away, like pandemic uncertainty, or rampant inflation, another emerges to drive the price up further, like the expectation of falling rates or, heightened geopolitical risk. And throughout this time central banks have continued to support the gold price by adding to their coffers. So, can this run continue? The outlook certainly seems positive.
Interest rates
The received wisdom is that investors prefer non-yielding assets like gold when interest rates are low, rather than high, because the opportunity cost of holding those assets decreases. Investors aren’t missing out on significant interest income from bonds or savings accounts, making gold more attractive by comparison. So, it follows that the current high interest rate regime should be ‘bad’ for gold.
And while it’s true the gold price tempered its growth in the early part of 2022 as rates began their ascent, gold picked up momentum later in the year despite central banks around the world aggressively raising rates. At the time, the value of gold was driven by other factors like inflation and geopolitics, which outweighed the supposedly dampening interest rate effect.
Inflation in particular helped lift gold demand in late 2022 and 2023 because commodities, particularly gold, are often identified as an inflation hedge. They’re subject to the same inflationary pressures as other goods so tend to rise when inflation rises. The relationship is not absolute, as there are many factors that influence the gold price, including interest rates, but gold has held onto its safe-haven status specifically because it has maintained value over thousands of years.
Once inflation eased, central banks were expected to begin to cut interest rates, and forecasts for a Fed rate cut in the US have been driving gold in the first half of 2024. A rate cut would put gold back on the front foot in regard to opportunity costs. The fact that this rate cut has been predicted for over six months and repeatedly pushed back as economic indicators failed to improve hasn’t dented the impetus behind gold demand. The ‘higher-for-longer’ rate trope still hasn’t managed to put the brakes on gold’s rise, because the market keeps expecting a cut, so gold is still benefiting.
The consensus among market experts is that US interest rates will finally start to fall in September, and possibly again in November and December. This should provide a positive driver for the gold price throughout the cycle of interest rate cuts. Because gold is denominated in dollars, the US Federal interest rate is the most pertinent to the gold price although other countries also haven’t started cutting yet, including the UK. The European Central Bank cut rates for the first time in five years in June 2024, but chose not to cut them further in July amid lower but stubborn inflation and tepid economic growth.
Geopolitical risk
Geopolitical tensions will always exist, it is just the degree to which they impact on global economics that may wax and wane. The Geopolitical Risk Index (GPR), developed by two Federal Reserve experts, uses media coverage of geopolitical tensions to calculate risk, and it’s been on the rise for some years.
Even accounting for the major peaks that accompanied the outbreak of the Russia-Ukraine war and the start of the Israel-Gaza conflict, global risk remains high relative to the pre-pandemic years.
And it isn’t only conflict that can tip the risk scale, political uncertainty also plays into the tension mix. 2024 is a bumper year for global elections, with the UK now in possession of a shiny new government and the US due to go to the polls in November. The US election in particular will cast a shadow of unpredictability over geopolitical relations. A Trump win would put US policies in his mercurial hands again, and that can be a very volatile place.
Gold performs well when risk is palpable. It is a safe-haven asset for a good reason – immutability and long-term value. For centuries physical gold investment has been a key value protector in volatile times – rising when markets are falling, and holding its value over the long term.
Central bank gold buying
Central banks have been buying gold throughout 2023 and 2024, sustaining a long stockpiling streak that has helped bolster the gold price. The World Gold Council estimates that central bank buying contributed at least 10% to gold’s performance in 2023 and potentially around 5% so far this year.
They’re buying for some of the same reasons we are. Rising geopolitical tensions, including conflicts and trade disputes, have made gold an attractive asset. Central banks buy gold to hedge against geopolitical risks that could impact currency values and global financial stability.
Central banks also buy gold to diversify their reserves and in some cases reduce their reliance on major currencies like the US dollar and the Euro. It helps protect them from potential declines in their home currency’s value.
While economic uncertainty and inflation may have tempered in many developed nations, it is still running high in some less developed ones.
Over the last two years, gold demand has primarily come from countries like China, Turkey, Singapore, Poland, India and the Middle East. China, in particular, has been a voracious buyer recently, with the first quarter of 2024 marking the 17th consecutive monthly increase.
So, will it continue? According to the World Gold Council, data on central bank buying in the first three months of 2024 showed on a similar trend line to last year which proved to be a bumper one for central bank buying.
The gold group also published results of its 2024 Central Bank Gold Reserves (CBGR) survey, in which 29% of central banks respondents intend to increase their gold reserves in the next twelve months, the highest level since the survey began in 2018.
The second half
This year has started as last year ended, with a raft of gold demand drivers pushing the precious metal to all-time highs. These drivers are still there. Interest rate cuts, so long predicted, will finally become a reality, underpinning demand for non-yielding assets like gold, geopolitical tensions seem unlikely to ease off, and central banks are planning to add to their coffers. Is it time you did too?
