This gold rush has staying power

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If the rise in the price of gold this year shows anything, it’s that the precious metal is no longer inextricably linked to the interest rate cycle. But that doesn’t mean lower rates won’t have an impact: Last week’s talk at the Jackson Hole Symposium in Wyoming about future cuts will give gold some extra sparkle.

Traditionally, gold is seen as a better investment when rates are low and when other asset classes aren’t too big. Therefore, it should have had a weak start to 2024, given the unexpectedly strong performance of US stocks, the resilience of the economy and a delay in expected Federal Reserve tapering. However, it has risen 22% this year, outperforming the S&P 500 and recently topped $2,500 a troy ounce.

Clearly, there were some buyers whose primary concern was not the opportunity cost of owning gold. Enter the central banks, which in the first half of the year bought 483 tons of the precious metal, says the World Gold Council. This is the largest amount since the body began collecting data. It’s hard not to attribute some of this colossal buying spree to the Russia-Ukraine crisis and, in particular, the Russian central bank’s asset freeze that took place in 2022. This, predictably, has sparked a desire in major emerging economies to away from the dollar.

While quarterly purchases will fluctuate – and indeed were lower in the second quarter compared to the first – this looks like a structural tailwind for gold demand that is independent of anything going on in the financial system .

Superimposed on this trend is the traditional portfolio rotation into gold, which occurs when interest rates fall. Wealthy individuals and financial investors filled their vaults. Gold traded fund flows resumed in May, and July was the third consecutive positive month with inflows of $3.7 billion. While this is cyclical rather than structural, it doesn’t look like it will change any time soon. This summer’s market turnaround should also help boost interest in gold as it raises concerns about equity market volatility.

There are, of course, many scenarios where the sheen comes out of trading gold. An acceleration in stock market growth, higher rates for longer and declining geopolitical risk could all conspire to reduce demand for the metal. But as it stands, the case for all of this appears to be lackluster.

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