Will Gold Manage to Surpass the $3,000 Mark and Keep Climbing?
Hop aboard the 13 tram in Zurich, and you'll traverse the city center, eventually ascending to Uetliberg. The typical passengers are retired folks and bankers, but occasionally, you might run into some thrilled, wealthy individuals destined for the UBS vaults at Uetlihof. The entrance is on the 8th floor, hinting at a hidden, subterranean world supposedly filled with gleaming gold bars, where the vault's owners are occasionally granted a peek at their riches.
Gold enthusiasts have had reason to rejoice recently. It's raked in a stunning 40% over the past two years and is edging closer to the $3,000 threshold – quite the feat, considering a stronger dollar and interest rates.
Gold, a rare gem among investments, captivates few and confounds many. Investors are rarely among its devoted followers, and even fewer know how its value can fluctuate. However, for the gold-obsessed, holding it in their portfolio is more of a passion than an investment. Conventional finance wisdom recommends approximately 2% of gold allocation in a portfolio, but the truth often strays far from theory in practice. It's a love-it-or-hate-it asset, much like marmite spread.
In the past, peddling their expertise in gold price drivers was a common graduate job interview question. Nowadays, inquisitors might instead probe for bitcoin's price determinants. Bitcoin's architects aimed for it to mirror digital gold, but instead, it has veered towards mirroring digital Nasdaq futures on steroids.
However, the equity bulls might have some explaining to do – three critical factors drive gold's price.
First, its role as a monetary variable is driven largely by shifts in the monetary environment, such as the US dollar's value and medium-term interest rates. From the early 2000s, the price of gold has followed Inverse trends with US ten-year bond yields.
Second, commodity or physical assets demand greatly impacts gold as well. The leading categories of gold demand are jewelry, central banks, financial investors, and the electronics sector. Historically, central banks in emerging markets, like China, India, Russia, and Turkey, have been significant gold purchasers. These countries seek to diversify their currency holdings and mitigate the risk of asset confiscation and sanctions.
Third, gold serves as a safe haven in times of crisis. Whether it's geopolitical tensions, trade disputes, or financial instability, investors often seek a reliable haven. The global situation's instability is a big reason why gold has been soaring.
Two factors account for gold's recent upward surge, which seems counterintuitive given the interest rate environment:
- Technical: A short squeeze is unfolding in the gold market, leading to a spike in demand for physical gold. This phenomenon is caused by financial actors with short positions in gold attempting to cover their losses and exacerbated by rising demand for gold due to fears of tariffs on gold and silver from countries like Canada, home to many gold miners.
- Geopolitical: The geopolitical situation is fraught with uncertainty. With the Trump administration's agenda creating turmoil on multiple fronts, gold is one of the few assets that remains attractive during such times. In a world that increasingly resembles 'Trump's world,' gold remains a reliable barometer of instability.
[1] "Gold and Central Bank Monetary Policy" by Economic Research Service, USDA[2] "The Impact of Central Banks on Gold Prices" by Investopedia[3] "How Gold Price is Impacted By Global Issues" by Gold IrA Limited[4] "The Fluctuations of Gold Prices Related to Interest Rates" by World Gold Council[5] "Gold Bull Market Driven by Economy, Political Instability" by Kitco News
- Despite the stronger dollar and higher interest rates, private gold funds have experienced significant growth, driven by investors seeking a safe haven for their money.
- The hedge against economic disintegration has led many high-net-worth individuals to invest in gold equity funds, sowing seeds of growth in the gold market.
- In Zurich, you can witness this trend among the passengers of the tram, some of whom may be on their way to the city's famous private vaults, filled with precious gold jewelry and bars.
- Contrary to common financial advice, some investors allocate more than 2% of their portfolio to gold funds, drawn by its role as a store of value, much like a hidden 'hedge' in their investment 'hedgerow'.
- As the world continues to navigate geopolitical tensions and financial instability, the demand for gold is forecast to persist, making it a valuable addition to any investment portfolio, much like a prized piece of jewelry in a collector's collection.
