Potential gold rush in the offing?
Rewritten Article:
Gold's current allure isn't just confined to the Städel Museum's exhibition titled "Golden Times?" showcasing Amsterdam's golden age of the 17th century. The gleaming metal itself has been drawing attention with a notable surge in its prices this year.
Since January, gold prices in US dollars have skyrocketed by more than a quarter, hitting a high of $2,790 per ounce before the US election in late October. This rate, adjusted for inflation, is just 15% shy of its peak in 1980. Accounting for British pounds inflation, the gold price is even within 10% of its high at the end of the 15th century, just before the Spanish conquistadors flooded Europe with New World gold and silver.
The gold rush may not be over yet, according to analysts. However, the price will hinge on various factors, with interest rates playing a crucial role. The US Federal Reserve's interest rate cuts this year, coupled with the anticipated reduction to around 4% in 2025, partly explain this gold price surge. But if markets begin pricing in fewer cuts due to the future US president's policy measures (tariffs, tax cuts, immigration restrictions) leading to higher inflation, this could create a short-term squeeze on the gold market.
While there are valid reasons to question a structurally high gold price given weaker relationships between the real interest rate level and the gold price in recent years, the experts have good reasons to be optimistic. For one, in the medium term, higher inflation than the pre-COVID crisis two decades may be anticipated, thanks to deglobalization, demographic changes, China's growth, and decarbonization—supply shockswith overall medium-term inflationary impacts. Furthermore, there's a monetary overhang due to massive monetary stimulus packages in response to the COVID-19 crisis, and high public debt ratios suggest an increased risk of inflation being employed as a form of debt relief. Analyses by AllianzGI indicate a medium-term US inflation rate of 2-3%, above the Fed's inflation target of 2%. The same applies to the Eurozone.
Secondly, geopolitical risks have heightened since the beginning of the Ukraine conflict in 2022, according to Dario Caldara and Matteo Iacoviello's index. Geopolitical risks have generally surpassed the average since the end of the Cold War. Historically, the gold market has responded positively to geopolitical events.
Finally, since 2022, demand for gold from emerging economies, particularly China, Turkey, and Middle Eastern states, has significantly increased. This trend is attributed to these countries safeguarding their reserves from foreign interference by converting them into gold.
Stefan Hofrichter, Head of Global Economics & Strategy at Allianz Global Investors, maintains that gold is not done shining.
Investing in personal-finance may include considering gold as a potential investment, given the surge in its prices this year and analysts predicting that the gold rush may not be over yet. The US Federal Reserve's interest rate cuts this year, coupled with the anticipated reduction to around 4% in 2025, partly explain this gold price surge in the finance sector.
In the medium term, higher inflation than the pre-COVID crisis, due to factors such as deglobalization, demographic changes, and decarbonization, could further drive the demand for gold, making it an appealing option for personal-finance investors.
