Gold is smashing its way through 2024. Not only did it have its best six-month start to a year (since 2020) but it also broke through a new price record in March. This winning streak has continued and now in July it has done the very same, hitting another record high.
Dave Russell, CEO, GoldCore Ltd
What is it about 2024 that is making gold perform so well? Especially when the usual nemeses of the yellow metal – a strong US dollar, rising US bond yields, and tightening monetary policy – have also been ever-present in the market? Gold prices have historically shown a strong inverse relationship with US bond yields and the US dollar. Typically, lower US bond yields – which often coincide with a weaker dollar – tend to result in higher gold prices, and higher bond yields with a stronger dollar lead to lower gold prices. This pattern occurs in approximately 43.8% of cases.
But right now, we are in a scenario that only happens 17.5% of the time, and that’s where US bond yields are up, the US dollar is up, and the gold price is up. The US dollar and bond yields are performing well because the US economy is performing well relative to others. When compared to other currencies, the US dollar is usually preferred when there is a flight to safety. And, as we know, the same can be said for gold, but it’s not usually preferred to the US dollar, and vice-versa.
So we are in unusual times, and it’s not just with the US dollar and gold price. Whilst gold is traditionally viewed as a hedge against inflation, high US bond yields, which usually rise in response to inflation, can increase the opportunity cost of holding non-yielding bullion. So again, you also don’t expect to see them both climb in price. However, when the primary risks that necessitate hedging (i.e., create demand for a safe haven) come from outside the United States and the US economy is not experiencing significant downturns, it is possible for US bond yields, the US dollar, and gold to rise simultaneously.
So what are the external (to the US) primary risks that are necessitating hedging with gold? Well, in times gone by when we saw this same situation, they occurred during tough global events such as the 1998 Asian financial crisis, the 2005 avian flu outbreak and French riots, the 2008 financial crisis, and the 2014 Ukraine crisis. Today is not dissimilar. We have major wars, with the potential to turn even more nasty – Russia/Ukraine and events in the Middle East – this is driving demand. But also, we are seeing demand from central banks outside of the US because they want to protect themselves with gold.
In a World Gold Council survey, the number of central banks increasing their reserve allocation to gold because of de-dollarisation plans, fears of sanctions, or preparing for changes in the international monetary system is increasing substantially. Although these might appear to be issues that are currently at arm’s length from us, they are actually quite prescient. We are beginning to see an uptick in investor and saver demand, as this concern to hold a safe haven is trickling down through the economy. Watch this space as the gold price continues to bulldoze its way through 2024 and protect portfolios from the uncertainty ahead.
