Here’s What’s Driving Gold Prices To New Highs
Geopolitics, hopes of lower interest rates, and monetary uncertainty, are all helping the yellow metal.
Gold hits a fresh all-time high
I wrote about gold just last week, but I thought we should revisit the topic, because it has now hit a fresh record high.
The price almost hit £1,680 an ounce in the early hours of this morning, before easing back to £1,632 or so.
Those figures might leave you feeling a little disorientated. Gold is typically quoted in US dollars, and it hit a record high in those terms too, spiking all the way up to $2,135 per ounce in those wee small hours before slipping back to around $2,070.
It’s the US dollar price that everyone watches, and gold’s spike was, I suspect, something to do with lots of people and algorithms automatically hitting the “buy” button once it had gone above the $2,080-odd level that technical analysts have been watching like hawks.
But I thought I’d quote it in sterling to show that gold’s strength is not just a weak US dollar story. Which does rather beg the question — what is it then?
Gold Spikes Higher
The reality is that no one is entirely sure what’s driving gold higher. The obvious proximate cause — ie the short-term thing that seems to have made it jump above the record level — was Federal Reserve boss Jerome Powell not being aggressive enough in his “higher for longer” insistence on Friday. My colleague John Authers has more on that here.
Hopes of falling interest rates are certainly helpful for gold, particularly if the baseline implication is that the central bank does not have the stomach or the latitude to fight inflation aggressively.
But that in itself doesn’t explain its general resilience this year. The flipside of falling interest rates being “good” for the gold price is that rising interest rates should’ve been bad for gold, and they haven’t been (at least not to the extent that models based on “real” interest rates would imply).
What about geopolitics then? The global political landscape is certainly messy, but if you look at history, this too is an insufficient explanation. You tend to find gold spiking on nasty news, but then retreating pretty quickly as markets wrap their heads around the scale of any new situation.
In this case, for example, the Israel-Hamas war continues but it hasn’t spread beyond the region. The war in Ukraine continues but mostly not in the headlines. And while China’s economy is in a state, and Cold War 2.0 is still rumbling along, there haven’t been any obvious surprises or deteriorations. So geopolitics doesn’t explain it.
According to data compiled by Bloomberg, demand from investors in exchange-traded funds (ETFs) is not the answer either. Indeed, ETFs have sold off 7.85 million ounces of the stuff this year, a drop of around 8.4%.
Source: Bloomberg
So where is the demand coming from? Louis-Vincent Gave over at Gavekal put out an interesting note at the end of last week. His argument is that one big driver of gold is demand from wealthy consumers in emerging markets.
So, asks Gave, the question for gold investors is this: “Will the number of rich people across emerging markets rise rapidly? And will those rich people invest in gold?”
On a quick romp across the big emerging markets, Gave concludes the following: India is a big buyer of gold, and this will probably continue as domestic wealth grows, despite competition from domestic stocks.
The “de-dollarisation” argument then starts to come into play. China may be keen to buy gold as a diversifier away from US government debt, for example. It’s a similar — though even more marked — story for Russia. Citizens of both countries may also see gold as one of the better ways to store wealth outside of a financial system that they don’t necessarily trust.
In a similar vein, Gave also notes that Saudi Arabia recently signed a renminbi “swap line” with the Chinese central bank. If the Middle East is edging away from the US dollar, then that, as Gave puts it, makes “currency uncertainty” a live issue for investors in the region, which in turn is another tailwind for gold.
Edging Away From the US Dollar
The de-dollarisation argument is a tricky one. People have been talking about the “death” of the US dollar for as long as I’ve been a financial writer and for many decades prior to that.
Sure, just because it hasn’t happened yet doesn’t mean that it won’t (sterling used to be the “reserve” currency, after all). But it’s also easy to be seduced by apocalyptic tales that focus too much on the flaws of the US system without considering how much worse all the alternatives are.
That said, there’s a lot of ruin in a currency. You don’t need the US dollar to stop being the big daddy altogether. You just need it to be a little less dominant for investors at all levels to start to feel that a little bit more diversification is sensible.
On that front, I don’t think it’s hyperbolic to suggest that uncertainty about the future of money and its precise nature and structure over the coming decades is more up in the air than it has been in a while.
It’s not just about overt power struggles and the end of Pax Americana and Cold War 2.0 and all the rest. It’s also about technology and digital currencies. Note that Bitcoin is also spiking (my old friend Charlie Morris of Byte Tree keeps pointing out to me that his patented 80/20 “BOLD” mix of gold and Bitcoin has done extraordinarily well).
You may be sceptical of the need for or desirability of digital currencies. And it’s very clear from the majority of the guests on the Merryn Talks Money podcast that many see crypto as a scam, or something close to it. But governments around the world continue to plug away at their own CBDCs (Central Bank Digital Currencies) so I don’t think we can pretend that this stuff is just going to go away.
Anyway, in terms of what this means for your portfolio, as I said the last time, I think it’s a useful component of your overall asset allocation. In other words, you should just own some for diversification and “disaster insurance” if nothing else. Beyond that, anything else is a trade.
Mid-day markets
Looking at wider markets — the FTSE 100 is down around 0.4% at just under 7,500. Gold is down around 0.1% at $2,070 an ounce, and oil (as measured by Brent crude) is down about 0.5% at $78.40 a barrel. The pound is trading about 0.25% lower against the US dollar at $1.267.
Quote of the day
Putting a number on… bank error in your favour
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$86.3 million
The amount mistakenly credited to the deposit account of a customer at Malaysia’s biggest bank. Sadly, she couldn’t actually withdraw it.
Originally published by: John Stepek on Bloomberg
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