It was just a few weeks ago when gold bulls celebrated the fact that a gold bar - typically 400 troy ounces - was worth $1 million for the first time ever, as the price of gold hit $2,500 an ounce.
Since then, gold (GCZ24) has continued rumbling higher, and even hit a new record above $2,600. So, why is gold rising?
Why Gold Is Up
Gold bullion has now risen by about 25% this year, with recent strength underpinned by the realization that the Federal Reserve has embarked on a rate cutting cycle. It seems that Fed Chair Jerome Powell’s Jackson Hole speech — which promised rate cuts — was a watershed moment for gold.
After Powell laid out his interest rate roadmap at the Jackson Hole symposium, U.S. 10-year real yields have now retreated to the lowest level since December. The yield on the 10-year TIPS (Treasury Inflation-Protected Securities) is down to 1.56% from 2.20% in June. The speed of the move down in real rates has taken some by surprise, but not gold investors, who have seen this coming for a while.
Strong central bank buying (mainly in emerging markets), and robust demand in the over-the-counter market from wealthy investors, have also helped the precious metal’s rally.
Central banks, in the first half of the year, bought 483 tons of the precious metal, according to the World Gold Council. That is the highest amount since it started collecting data. It is hard not to attribute some of this buying spree to the Russia-Ukraine war, and in particular to the freezing of Russian central bank assets that occurred in 2022. That, predictably, sparked a desire in large emerging economies to shift away from the dollar.
For the past 20 months, a major factor behind the rise in gold was the massive buying coming out of China. As its real estate and stock markets stumbled, Chinese investors sought the safe harbor that is gold.
Physical Gold ETF Flows
But now, finally, Western investors are beginning to awaken to the allure of gold. As of late August, holdings of physically backed gold ETFs had risen by 90.4 tons, equivalent to $7.3 billion, since May, according to data from the World Gold Council. Holdings in SPDR Gold Shares (GLD) expanded for eight straight weeks, the longest run of inflows since mid-2020.
Citigroup sees inflows into ETFs expanding “significantly” over the next six to 12 months, with demand bolstered by looser monetary policy, as well as worries about a recession. Gold may reach $3,000 by mid-2025, the bank said in a note before Powell’s address.
The market can expect large ETF flows when the Fed actually makes its first rate cut, according to UBS Group, which sees prices at $2,600 for the last quarter of this year. And of course, the Fed just did cut rates, by 0.5%.
Gold as a Hedge
How good of a hedge is gold? Over the past 20 years or so, gold has performed much better than the other classic diversifying hedge for a stock portfolio - bonds - even though its returns have been inconsistent.
That said, I don’t need my stock hedge to provide steady gains. What I need is for it to perform particularly well at moments when stocks perform terribly - and gold has done consistently well on that front.Here are total returns for the S&P 500 Index ($SPX), gold, and Treasuries in four stock market swoons, using Bloomberg data from an article by the Financial Times’ Robert Armstrong:
- September 1, 2000 through October 9, 2002: S&P 500 (-47%), Treasuries (+25%), Gold (+16%).
- October 9, 2007 through March 9, 2009: S&P 500 (-55%), Treasuries (+15%), Gold (+ 21%).
- October 3, 2018 through December 24, 2018: S&P 500 (-19%), Treasuries (3%), Gold (+ 6%).
- January 3, 2022 through October 11, 2022: S&P 500 (- 24%), Treasuries (-13%), Gold (- 7%).
As Armstrong wrote, “Gold was a better hedge than bonds in the great financial crisis, at the end of 2018, and in the 2022 inflation/rates rout. Only in the dotcom bust were bonds superior, and gold was still up then. Gold is a quite good asset for risk-off moments.”
I totally agree.
What Comes Next for Gold
So, where does gold go from here?
I believe Citigroup is correct, and $3,000 an ounce is within reach. Perhaps as soon as year-end.
We now have strong buying from central banks and Asian investors, combined with falling interest rates and inflows into bullion-backed ETFs. It’s a near-perfect scenario for gold to move on to further all-time record highs.
I continue to prefer physical gold ETFs, particularly the Sprott Physical Gold Trust (PHYS). Its shareholders have the right to redeem their shares for gold bullion. The custodian for the 400 ounce gold bars is the Royal Canadian Mint.
PHYS is up 25.6% year-to-date and more than 32% over the past 52 weeks. It’s a buy at the current price of $20, with up to $21 a good price.
