Gold continues powering ever higher, after December-dated futures (GCZ24) burst through the $2,700 level on Oct. 18. It was around $2,000 an ounce as recently as February.
The shiny yellow metal has hit successive all-time highs in recent months, and is up by more than 30% this year. Along with safe-haven demand and U.S. political uncertainty, the rally has been fueled by robust central bank buying and expectations of interest rate cuts by the Fed.
Western investors have also helped drive prices higher, after largely remaining on the sidelines in the first half of the year as Asian investors gobbled up gold.
The Fed’s pivot to looser monetary policy has bolstered the appeal of exchange traded funds (ETFs) backed by bullion, with holdings of gold on course for a fifth monthly expansion in October — the longest run of inflows since 2020. Citigroup sees these inflows into gold ETFs expanding “significantly” over the next six to 12 months.
And it’s not just investors.
Bullion is absolutely flying off shelves at Costco Wholesale (COST) stores across the U.S. The company’s one-stop shopping convenience is bringing gold buying to the general public by offering prices that undercut traditional precious metals dealers, and extra rewards for its most loyal customers.
Costco started selling bullion in June 2023 in its U.S. stores and on its website. The Swiss-made 24 karat bars are small — about the size of those mini chocolate bars (but thinner) you hand out on Halloween.
Why Is Gold Soaring?
So why has gold soared in 2024?
One reason is that a measure of long-term expectations for consumer prices - the Treasury breakeven rate - has climbed steadily recently and now stands around 2.3%, which is above the Federal Reserve’s target.
There is a growing sense that the absolute conviction of inflation returning to 2% on Wall Street might be more faith than fact. Inflation will be harder to vanquish than people realize — the so-called “last mile problem.”
And of course, we have those geopolitical tensions in the Mideast and Ukraine.
The freezing of Russian assets has pushed other central banks in the emerging world into gold. The world’s central banks purchased a record 483 metric tons of gold in the first half of 2024, according to the World Gold Council.
Finally, there is the China factor. For the past nearly two years, there has been massive buying of gold from China. As its real estate and stock markets stumbled, Chinese investors sought the traditional safe harbor that is gold.
What’s Next for Gold?
In September, I said that $3,000 gold is coming. And it is - the outlook (except for the very short-term) for gold still remains strong.
The precious metal is expected to climb to more record highs over the next year, according to a survey of the bullion industry at the recent London Bullion Market Association event in Miami. Delegates surveyed expect gold to rise to $2,917.40 an ounce by late October next year, about 10% above current levels.
It is interesting to note that the delegates were even more bullish on silver (SIZ24). It is forecast to gain more than 40% in the coming year to reach $45 an ounce, and is already trading at nearly a 12-year peak.
Another interesting note is seeing what the “smart money” - the world’s wealthy - are doing. Family offices and asset managers that cater to the rich are increasing gold’s allocation within their portfolios to the 10% to 15% range, up from a historical allocation around 5% to 7%.
Buy PHYS
So, where does gold go from here?
I believe $3,000 an ounce is easily within reach. Perhaps as soon as year-end.
If we look back to gold’s peak in 1980 at $875 an ounce, and adjust it for both inflation and the change in the value of the U.S. dollar, it comes to a gold price above $3,400 an ounce.
Philippe Gijsels, the chief strategist for BNP Paribas Fortis, and his colleague, chief economist Koen De Leus, are the authors of The New World Economy in 5 Trends. It’s an interesting read, and offers a how-to for investors in times of high inflation, hyper-innovation, an aging population, and a building climate crisis.
The authors predict that gold will rise from its current price to reach $4,000 in “the not so distant future,” as people hedge against a “new world.” That seems very possible to me.
At the moment, we have strong buying from central banks and Asian investors, combined with falling interest rates and inflows into bullion-backed ETFs, as Western investors wake up to gold’s allure. 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 32.7% year-to-date and 37.8% over the past 52 weeks. It’s a buy at the current price of $21.14, with up to $22 a good price.
