Market Watch: Why gold hit an all-time high this year... and can it keep rising?

As global investors watch, wait and worry about when interest rates will finally come down, one of the world’s oldest investment options - gold - has surged to an all-time high this year.

The precious metal climbed 10 per cent in the first four months of the year to peak at almost US$2400 ($3990) an ounce by mid-April. It is up almost 50 per cent since 2022.

While it has drifted back in the past couple of weeks, it remains at historically high levels, above US$2300.

“Obviously, gold is seen as a safe haven,” says Pie Funds chief investment officer Mike Taylor.

Rising tension in the Middle East this year had played a part in its surge, he said.

“But it’s not just that. There are central banks around the world looking to diversify out of holding US dollars. And they’re buying gold instead,” Taylor said.

“Gold is seen as an alternative investment and a number of big investors around the world have an allocation to gold. But the main buyers at the moment seem to be the Central Banks because they don’t want to have all their reserves held in US treasuries.”

Compared to other safe-haven investments like bonds, the main difference with gold was that you didn’t get a return from holding it, Taylor said.

“So you only get the capital return over time. It’s supposed to be a protection or hedge against inflation. But you’re not gonna get a yield paid the same way you will with money and cash or money and bonds.”

Another driver of the “gold rush” this year has been increased demand from Chinese investors.

The New York Times reports that Chinese consumers have “flocked to gold as their confidence in traditional investments like real estate or stocks has faltered”.

It also points to moves by the Bank of China to steadily increase its gold reserves, cutting its holdings of US debt.

Can it keep rising?

As an investment, gold historically goes up when interest rates go down - and down when rates go up. That’s because its status as an investment with no yield is more appealing when rates are low anyway.

So in some respects, the price may have gotten ahead of itself this year on expectations of US rate cuts. That would explain the recent correction (as markets have pared back rate-cut hopes), but it would also suggest that it may still have some way to go once rates do actually start to fall.

Exactly when that will happen remains uncertain, with market pricing flip-flopping in recent days around comments from the US Federal Reserve chair, Jerome Powell.

“We started the year in the US with about six 0.25 per cent rate cuts priced in,” Taylor said.

Mike Taylor is founder and chief investment officer at Pie Funds.

“Almost all those rate cuts have been removed - there’s a chance of a small one in December, I think we’d almost reached the point where the markets were actually worried that the Fed might start hiking again,” Taylor said.

At the latest Fed meeting last week, Powell had allayed those fears.

Inflation has come down quite a long way, but sometimes, getting that ”last mile” of inflation out of the economy was hard, Taylor said.

“Central Banks, or the Reserve Bank here, have got to be quite careful that they don’t push economies deep into recession by holding rates too high or too high for too long.”

Dwindling rate cut expectations had seen US markets fall back through April, he said.

“Tech stocks were down about 5 per cent. And even the Dow Jones [industrial index] was down 5 per cent for the month because a lot of those companies are tied to interest rates - whether that be real estate or infrastructure assets.”

Even Bitcoin had a challenging month in April as it seemed to correlate with how the Nasdaq performs, Taylor said.

“On the flipside, gold’s been very strong this year and held on to most of those gains throughout the month.”

The Market Watch video show is produced in partnership with Pie Funds.

Liam Dann is business editor-at-large for the New Zealand Herald. He is a senior writer and columnist. He also presents and produces videos and podcasts and is the author of the best-selling book BBQ Economics. Liam joined the Herald in 2003.