https://www.cwbwealth.com/en/news-and-stories/insights/understanding-the-gold-rush-what-drives-the-price-of-gold-and-how-it-affects-investors
Few assets garner as much global attention as gold. Its appeal as a symbol of wealth, power and beauty has existed across cultures and civilizations. And from ancient kingdoms to today’s investors, gold has been viewed as a financial haven to protect wealth in uncertain times. But what really drives gold’s price today and how can investors decide if it’s worth adding to their portfolios?
With the recent increase in gold’s value, many of my clients are asking if they should buy it. Maybe you’re wondering too. Let’s break down the factors influencing gold’s price and reasons to consider a position in your portfolio.
Most commodities’ price movements rely heavily on supply and demand. Gold’s pricing is somewhat unique. It can be driven by more traditional influences, like jewellery production, industrial applications, and availability. But its larger drivers are complex forces arising from economic, political, and geopolitical events.
Gold as a “safe haven” asset in economic uncertainty
Gold thrives in times of economic uncertainty, such as when fears of recession, inflation or market volatility are high. This is because it tends to hold its value during such times, when other investments may not. For investors, gold’s potential to act as a safe haven from traditional stocks and bonds is compelling. While it doesn’t provide income, such as dividends, at times it can offer peace of mind.
The USD’s influence on gold
Gold is priced in USD, so factors that impact the USD—either directly or indirectly—can significantly affect gold’s pricing. For instance, when economic growth is slow, the USD could weaken which tends to raise gold’s value. Conversely, when economic growth rises so can the dollar, and gold may weaken. Knowing this could help investors anticipate price changes and seek gold out as a hedge.
A hedge against political instability
Political uncertainty (such as the pending U.S. presidential election) can cause investors to hedge their investments until that uncertainty abates. Given that government spending is likely to persist regardless of who wins the U.S. election, the increasing U.S. deficit remains a factor in assessing its economic strength. The Congressional Budget Office projects that interest payments on the debt will increase to $1 trillion in 2025 and to $1.7 trillion in 2034.
This underscores the potential value of investing in gold as a hedge against economic instability. Investors should remember that gold can also be volatile, and avoid over-allocating in anticipation of political turmoil alone.
Geopolitics and central banks’ influence on gold
Central banks can strongly influence the demand for gold, and thus its price. When the economy is weak, they might print more money which can weaken the local currency if interest rates are low. To offset this risk, they buy gold to diversify their reserves. In fact, central bank purchases now account for 25% of total gold demand—double what it was before 2022!
With this in mind, investors may consider holding gold for diversification and protection from risks associated with exposure to international currency.
De-dollarization and gold’s role
While the USD’s reserve status may persist, there’s a noticeable shift toward alternative fiat currencies1 and possibly digital central bank currencies in the future. Some countries are actively seeking alternatives to the USD for trade, known as de-dollarization, to protect themselves and reduce their dependency on the U.S.
The use of sanctions, like those recently imposed on Russia, made other countries realize the importance of independence to help control and eliminate counterparty risk. Central banks, such as those in the BRICS2 countries, continue to add to their gold reserves and diversify away from US treasuries.
While investing in gold offers a way to align with this trend in de-dollarization, keep in mind that gold’s price is also affected by economic cycles and investor sentiment.
Geopolitical tensions and global conflicts
Global tensions arising from wars and conflicts create nervous investors, often boosting gold’s appeal—and its price. Today, there are more than 110 armed conflicts around the world. Having exposure to gold can help stabilize a diversified portfolio if you’re concerned about global affairs. However, investing in gold should be thought of as a safety net, not a replacement for growth strategy.
Ways to invest in gold
An investment in gold can occur through the purchase of bullion (bars, ingots, or coins), although storage must be considered, or through a gold bullion ETF which eliminates the storage issue and improves liquidity. Or, tactical exposure through a gold-related equity or a sector ETF can be lucrative under favorable conditions. Investing in individual gold companies can deliver good returns, potentially through dividends and/or stock appreciation.
CWB Wealth’s exposure to gold
At CWB Wealth, we monitor gold’s movements and integrate it into your portfolio only when it makes sense for your specific goals.
We offer our clients both third-party manager3 and internally managed solutions for investing in gold. For our internally-managed portfolio, we’ve identified Agnico Eagle Mines (AEM) as a company that was mispriced and had room to appreciate. AEM is a large cap, well-managed low-cost producer with a robust pipeline of development opportunities.
To date, we’ve benefited from this position in our Canadian Equity and the LFA Canadian Dividend pools. While we initiated a position in May 2021, we started to see movement around mid-February of this year (see figure 1).
Figure 1: Comparison of total return YTD of Agnico Eagle to the SPDR Physical Gold ETF
Source: FactSet
Gold’s unique ability to retain its value in uncertain environments makes it an attractive hedge against economic, global and political risks, as well as currency devaluations. That’s why we carefully evaluate its role in your overall portfolio and use it to complement other strategies.
While the historical appeal and potential safe-haven attributes of gold make it attractive, you should speak with your dedicated Private Wealth Advisor to consider its place in your overall financial picture.
1 Fiat currency is not backed by a physical commodity such as gold or silver, but by the government that issues it. Its value is derived from the relationship between supply and demand and the stability of the issuing government.
2 BRICS is an intergovernmental organization comprising Brazil, Russia, India, China, South Africa, Iran, Egypt, Ethiopia and the United Arab Emirates.
3 Clients who use our third-party manager solutions should speak with their advisor about their portfolio’s position in gold.
Sources:
What Is the National Debt Costing Us? – Peter G. Peterson Foundation, August 6, 2024
Research report by TD Cowen dated August 2, 2024 – Agnico Eagle
The Business Insider – 3 reasons to pile into gold with the metal poised to rally in 2025, according to Goldman Sachs, by Matthew Fox, September 3, 2024
Publisher – Newstex LLC
The Business Insider – 2 big reasons gold prices are set to surge 9% by early next year, according to Goldman Sachs, by Matthew Fox, October 2, 2024 Newstex LLC
What Drives the Price of Gold? by Taylor DeJesus
Why we believe gold stocks are the hidden opportunity in 2024’s bull market, by Frank Holmes, contributor, Great Speculations, Contributor Group
FORBESMONEYMARKETS
Economic Viewpoint: Why do gold prices keep setting new records by Marc-Antoine Dumont Senior Economist at Desjardins, June 19, 2024
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