Gold futures surged to a new all-time high overnight, as growing expectations for U.S. rate cuts early next year spurred a rush of buying. The precious metal leaped by more than 3% in early trading on Monday to hit a record above $2,130 an ounce, surpassing the previous all-time high it set in August 2020.
February-dated gold futures (GCG24) did reverse, though, as some hedge funds added to their favorite trade - shorting gold and putting the proceeds into the “Magnificent 7” group of tech stocks.
Nevertheless, gold has rallied about 10% just since early October, as Treasury yields and the U.S. dollar have both fallen amid growing expectations for the Fed to cut rates. And the precious metal has risen more than 600% since the turn of the century. However, when adjusted for inflation, gold remains below the high of $850 touched in January 1980 - which would be equivalent to more than $3,000 in today’s dollars.
Why Gold Is Soaring
This latest leg of gold’s rally is being turbocharged by comments on Friday from Fed Chair Jerome Powell that traders interpret as setting the stage for a pivot toward rate cuts.
Expectations for a possible Fed pivot have recently spurred a plunge in both the value of the U.S. dollar (down about 3% since the start of November) and Treasury yields. In fact, real yields have plunged 50 basis points since their peak in October, with the 10-year TIPS yield testing 2%.
Gold’s strength has been underpinned by a wide array of factors in 2023. These include a tidal wave of purchases by both governments and central banks around the world, because of geopolitical uncertainty.
As one trader told Bloomberg, gold “is the answer for many things at the moment – whether it’s inflation carrying on, rate cuts, or the uncertainty with very costly wars going on.”
As well as a new record level for gold, we might also have seen a new standard in volatility being set, as the yellow metal experienced $100 intraday swings. And while the gold price has calmed itself down a bit, make no mistake - we are in a new era for gold prices.
Retail Investors Missing Out?
However, many retail investors have missed out on gold’s rally. Perhaps they have been too busy chasing Wall Street’s latest hot trade - artificial intelligence (AI) stocks - to notice anything else going on in financial markets.
This raises the possibility of gold going even higher as latecomers look to buy. Investors in gold via exchange-traded funds (ETFs), a key driver of previous bull markets in the metal, have been sellers for much of this year, with fund holdings down by more than a fifth from a high in 2020.
Meanwhile, central banks have been buying as much gold as they can. China spearheaded record levels of central bank purchases of gold globally in 2023, as the People’s Bank of China snapped up 181 metric tons of gold in the first nine months of the year. Overall, central banks have bought 800 tons through September, up 14% year-on-year, according to a report by the World Gold Council, an industry group.
Staying in China for a moment, the retail investor there is also snapping up gold. As of the end of September, bar and coin buying in China had surged by 40 tons, or 1.4 million ounces year on year, to 197 tons.
What’s Next?
Gold has traditionally been the ultimate safe-haven investment, thriving in times of uncertainty. However, it’s also on a recent tear because of expectations around U.S. rate cuts, with the weaker dollar making it cheaper for non-dollar buyers. The Financial Times points out rising gold reserves at non-aligned and BRICS nations have been rising – as these nations have sold U.S. Treasuries, they’ve bought gold instead.
I think that the gold market may be sniffing out a second wave of inflation around the corner. The current significant loosening of financial conditions over the last few weeks will have an effect on the economy, with a bit of a lag. Goldman Sachs’s U.S. financial conditions index shows significant easing in the past few weeks, to the tune of the equivalent of nearly a 1% cut in the Fed funds rate.
If inflation starts to bite again, the Fed will be forced to tighten, and eventually something is going to break. Once something truly does break, what does Jay Powell do?
He could watch parts of the financial system around him implode - or he could take the Bank of Japan route with yield curve control and print his way out. Either way, gold is about as good a place as you can be when this happens.
One Top Gold ETF to Buy
There are a number of high-quality gold mining stocks out there, but my preference is to own ETFs that are backed by physical gold.
One such ETF is the Abrdn Physical Gold Shares ETF (SGOL), with a tiny management fee of only 0.17%. SGOL seeks to reflect the performance of the price of gold bullion, less its expenses.
Its key features include the following:
- Physically Backed: The Trust holds allocated physical gold bullion bars stored in secure vaults.
- Transparency: The metal is held in allocated bars and a bar list is posted daily on its website.
- Vault Location: The gold is held in London and Zurich in secured vaults.
- Vault Inspection: Inspectorate International, a leading physical commodity auditor, inspects the vault twice per year (including once at random).
SGOL is up about 16% over the past year. It is a strong buy under $20 a share.
