It has been a golden start to 2024 with the price of gold shooting to record highs, north of $1300 per oz. Why have the gold bugs returned and is there still time to buy gold?
Gold Picture | Shutterstock
The price of gold is up over 14% year-to-date (as of April 9th, 2024) and breached $1350 per oz for the first time ever. With two major wars and high inflation perhaps this was inevitable, but can gold keep rising or is the price already nearing a peak?
Source: TradingView
Why is Gold Going Up?
In 2024, the price of gold hit record highs for several interconnected reasons, influenced by geopolitical events, central bank policies, and broader economic trends.
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Geopolitical Tensions: The conflicts in Gaza and Ukraine, particularly with NATO's involvement against Russia, have escalated global uncertainties. Such geopolitical tensions traditionally drive investors towards safe-haven assets like gold.
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Central Bank Purchases: Following the seizure of Russian central bank assets, other - especially developing country - central banks have accelerated their gold buying for diversification and to enhance financial security. This trend aligns with a broader pattern of de dollarization, where countries reduce reliance on the US dollar, boosting demand for gold as a reserve asset.
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Economic and Political Uncertainties: The upcoming US presidential election and concerns over potential recessions and debt crises have intensified economic anxieties. Gold is traditionally sought after during such times due to its historical stability.
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Inflation and Interest Rates: Persistent inflation concerns, coupled with expectations that central banks, including the Federal Reserve, may cut interest rates, have made gold more attractive. Gold prices often move inversely to real interest rates and can benefit from inflationary environments as it's considered a hedge against inflation.
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Rise of Bitcoin and Other Alternatives: Concurrently, the rise of Bitcoin as a form of 'hard money' reflects broader concerns about the stability and future of traditional fiat currencies, particularly the US dollar. This sentiment can also support gold, seen as a traditional store of value amidst currency devaluation fears.
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Investor Behavior: Retail investment in gold, whether through physical purchases or ETFs, has been robust, reflecting broader market demand. Additionally, production challenges in gold mining—given that the easier-to-extract gold has already been mined—add a supply-side constraint that can drive prices higher.
The risks
Gold has been on an upward track over the past decade but has periodically gone through sharp periods of decline, even as the longer term bullish picture remained intact. Buyers of gold should always be prepared for such instances. In current circumstances, investors could lose confidence in further upside and choose to take profits should any of the following begin to materialize:
- If interest rates rise or stay stable against market expectations of a cut, it could boost the US dollar and diminish gold's appeal.
- Any de-escalation in global conflicts could lessen gold's safe-haven demand.
- Diminished inflation fears could reduce gold's attractiveness as a hedge.
- Stronger economic performance could shift investor preference to riskier assets, impacting gold demand.
Gold vs Bitcoin vs Bonds
Typically, gold and U.S. Treasury yields move inversely. When bond yields rise, the opportunity cost of holding non-interest-bearing gold increases, making bonds more attractive and often pushing gold prices down. Conversely, low yields make gold more attractive.
However, in 2024, if gold prices are rising alongside US Treasury yields, it may indicate that investors are buying gold as a hedge against uncertainties or inflation, despite higher bond yields or simply that the huge decline in the value of long term US Treasuries has undermined confidence in the asset class, leading to more bond selling, forcing yields higher.
Bitcoin and gold have reached record highs concurrently due to shared drivers like inflation fears, economic uncertainty, and low-interest-rate environments, which boost their appeal as alternative investments or hedges against fiat currency devaluation.
Both are considered stores of value, though they cater to different investor bases: gold as a traditional safe-haven asset and Bitcoin as a digital alternative. When investors seek non-correlated assets to diversify their portfolios or protect against economic instability, demand for both can surge, potentially driving their prices to new highs simultaneously.
How to Invest in Gold with FlowBank
Aside from buying physical gold, investors can also buy gold securities that track the price of gold. The two main means for doing so are by using a Gold CFD or a Gold ETF.
Gold CFDs (Contract for Difference) are financial derivatives that allow investors to speculate on the price changes of gold without actually owning the physical metal. When you trade a gold CFD, you agree to exchange the difference in the price of gold from when your position is opened to when it is closed.
Gold ETFs (Exchange-Traded Funds) are investment funds that trade on stock exchanges, similar to stocks. They aim to track the price of gold and offer investors a way to invest in gold without holding physical gold.
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*The information contained on this page does not constitute a record of our prices, nor does it constitute an offer or solicitation for a transaction in any financial instrument. FlowBank SA accepts no responsibility for any use that may be made of these comments and for any consequences that may result therefrom. Any person who uses it does so at their own risk.
