What’s driving up the price of gold?

ANALYSIS

Gold has been making a quiet comeback, steadily growing beneath the loud hype of Bitcoin and other trendy investments.

The old stalwart of the investing world grew 15 per cent throughout 2023 after a rough few years, and recently hit a record high of US$2200 ($4163) per troy ounce before easing back slightly.

That run doesn’t yet seem over, with JPMorgan Chase identifying gold as its number-one commodities pick in the coming year and forecasting the price will rise as high as US$2500 by the end of this year.

Context is always important when it comes to the markets. And it’s important to remember gold was sitting at US$400 a mere 20 years ago. The commodity might not attract all the excitable headlines, but it has maintained its legendary stability despite a period of enormous disruption in financial markets.

The thing about gold is that it has always been a litmus test for geopolitical activity. It’s less volatile than other investments, and the price is usually contingent on the level of geopolitical risk in the air at any given time.

The major elections in India and the United States, along with the ongoing conflict between Russia and Ukraine, are driving more investors towards gold because of the level of uncertainty currently brewing across the world.

But this interest isn’t only coming from individual investors.

China, India and global central banks have increased their gold reserves significantly in recent years.

Over the last 16 months China has been splurging on gold, increasing its total holding from just above 62 million troy tonnes in late 2022 to 72.58 million troy tonnes (equivalent to 2257 tonnes) this year.

This move is linked directly to China looking to diversify its commodity holdings beyond the dollar amid ongoing tensions with the United States. Being unshackled from the greenback will also put China in a better position to assert its global influence without overbearing dependence on the US currency.

Once again, we’re seeing how the story of gold is interwoven with the geopolitical grapples happening globally - particularly when it comes to the superpowers.

Another factor applying upward pressure on the gold price is the forecasts that interest rates will start to come down soon. Without the promise of guaranteed income returns of fixed deposits, investors are again eyeing gold as a safe bet in uncertain economic times.

That safe bet looks even more appealing when viewed in the context of the US dollar potentially devaluing in the lead-up to the upcoming US presidential election, which is promising to be yet another fiery exhibition of how divided the world’s wealthiest country has become.

Those who predict Bitcoin or other cryptocurrencies will soon replace gold as an investment option fundamentally misunderstand what makes gold such an attractive investment.

Bitcoin has had a major upside in recent years, but it remains highly volatile at a time when geopolitical events are unpredictable at best and chaotic at worst.

As the writer John Tamny recently pointed out in Forbes: “The simple truth about gold is that the yellow metal itself doesn’t move. Thanks to highly unique stock and flow qualities, gold is constant as a measure. That’s why markets happened on it as the definer of money par excellence over thousands of years.”

This is all to say that the predictions of the demise of gold in the face of trendy newcomers have been woeful exaggeration.

Gold may not carry the promise of doubling overnight on the back of a flurry of excitement, but you can rest assured it will still be around for some time to come - especially if China continues its splurge.

• Chris Smith is the general manager of CMC Markets for New Zealand.