Gold prices have experienced a significant surge this year, with prices climbing approximately 33%, surpassing the S&P 500 index’s 23% increase. Notably, gold hit a record high of $2,772 per ounce recently, marking growth in six of the last seven weeks. Gold's performance since the U.S. stock market bull run began in October 2022 has been remarkable, with returns of 67% compared to the S&P 500’s 63%. This makes gold a top global investment choice.
The SPDR Gold Shares, the largest gold ETF, manages $78 billion in assets and has seen $5 billion inflows over the past six months. Physical gold sales are booming as well, with Costco frequently selling out of gold bars. Wells Fargo estimates that Costco sells up to $200 million worth of gold bars and silver coins monthly to its members. Analysts describe this as a "perfect storm" for gold, suggesting future price hikes.
Central banks worldwide, particularly in Turkey, India, and China, have been purchasing gold aggressively. In the first half of this year, global central banks acquired a record 483 tons, aiming to diversify reserves and reduce dependency on the U.S. dollar. Concerns about U.S. financial sanctions and sovereign debt have fueled this trend, which is seen as structural and enduring.
Economist Mohamed El-Erian observed that the surge in gold prices reflects a strategic move by financial institutions to reduce dollar reliance and diversify assets. He identifies two fundamental factors: central banks diversifying reserves away from the dollar and payment systems moving toward non-dollar alternatives. This shift is evident in ongoing gold purchases and Russia's ability to sustain trade despite exclusion from the SWIFT financial network.
Geopolitical tensions have further strengthened gold’s status as a safe-haven asset. Concurrently, the soaring U.S. debt raises doubts about the historical safety of U.S. Treasury bonds. A Bank of America report highlighted gold as the ultimate "safe haven," leading traders, including central banks, to boost their gold holdings.
The "Trump trade" is also playing a role in gold’s rising value, driven by increasing odds of the former president’s election win, expected to inflate government deficits and debts, sparking concerns about inflation and dollar stability. Even without a Trump victory, deficits may grow, potentially boosting gold prices.
Historically, declining interest rates have favored gold prices. With the Federal Reserve anticipated to cut rates multiple times next year, lower rates should support gold prices. Investors are also watching global rate trends, with the Bank of Canada and the European Central Bank recently cutting rates and the Bank of England expected to follow suit beyond market expectations.
