Why gold prices keep going up and up

Financial markets are on edge. Trading desks around the world have become beholden to single data points about the American economy, with huge swings in asset prices becoming a daily ritual.
Last week’s release of jobs figures in the United States was a case in point. A mixed bag of solid jobs growth in August combined with a hefty downgrade to the previous two months led traders initially to ditch the dollar and buy US government bonds, betting on a bigger 0.5-percentage-point interest rate cut from the US Federal Reserve. Within minutes, though, this morphed into bearish “risk-off” trading, driving down stocks and strengthening the dollar. The new fragile consensus among investors is that the Fed will stick to a more modest quarter-point tightening at its next meeting in two weeks’ time.
One asset that has been immune to these vicissitudes is gold. The shiny metal is one of the best-performing assets in the world this year, rising by 16 per cent to $2,497 per ounce, having already hit record highs in May and July. Despite being seen as simply a haven in inflationary times, gold has managed to deliver the best inflation-adjusted returns of any key asset this year, worth a juicy 20.8 per cent, according to figures from Bank of America. Investors buying US stocks will have made real returns of about 16 per cent and of 14 per cent or so in London-listed equities so far this year.
It’s easy to be sniffy about “gold bugs”, those advocates for the precious metal often caricatured as apocalyptic anti-inflationary disbelievers in the modern monetary system. I admit I’ve often fallen into the camp of gold scepticism over the past decade, particularly when gold mania descends into nostalgia for the Gold Standard or the moral panic over hyper-inflation after the financial crisis.
Yet the merit of buying gold in the 2020s is about more than simply as a lustrous store of value when people are worried about inflation eroding the purchasing power of the money in their bank accounts. As I’ve written before, gold has become the go-to hedge for large parts of the world’s central banking community, who have become increasingly worried about the potential expropriation of their assets in a US-led financial system where the dollar is king.
Gold is now such a sure-fire bet in times of global political turmoil that investment banks are telling their clients to get in on the way up. Goldman Sachs thinks the metal will hit a record $2,700 an ounce by early next year, UBS is forecasting $2,800 and Citi thinks it will reach the giddy heights of $3,000 an ounce by the end of the same year.
“[Gold] remains our preferred hedge against geopolitical and financial risks, with additional support from imminent Fed rate cuts and emerging market central bank buying,” Goldman told its clients in an investment note last week.
Even after a two-year bull run, new tailwinds are likely to propel gold further this year. The precious metal bucked a historic trend in 2022 when it managed to gain in value during a period of high-yielding returns on bonds as global interest rates surged. Yet, rather than losing its allure in the face of high-yielding competition, international central banks stepped into the fray to snap up vast quantities of the metal after Russia was slapped with sweeping financial sanctions from the West.
Fearing that they could be next, emerging market central banks in non-aligned nations have been steadily building up war chests of gold, tripling their gold-buying over the past two years. Central bank net purchases rose by more than 200 per cent between June and July to 37 tonnes of gold, according to the World Gold Council.
China has led the way, becoming the single largest buyer of gold last year, building up its stockpile from negligible levels to among the top ten institutional buyers in the world. Although precise figures are hard to come by, the recent step-up in gold prices is probably the result of fresh Chinese central bank purchases this month after a hiatus earlier in the year.
Chinese buying is now the single most important determiner of gold prices, with a direct correlation between Chinese demand and the value of bullion. It’s not, however, merely a central bank story about global politics. The nation’s cautious consumers are also part of the modern gold rush.
Getting Chinese consumers to spend has become a thorny problem for Beijing’s Communist Party, which is struggling to animate the animal spirits of households scarred by punishing pandemic lockdowns. That’s not the case when it comes to gold. China accounts for a third of all physical global gold holdings and its citizens are snapping up gold bars and jewellery at a record rate, making up nearly 40 per cent of all retail demand this year. Chinese consumers are more likely to flock to gold during periods of growing economic uncertainty, steady income growth and lower interest rates, Goldman says.
Gold, it seems, just can’t be ignored any more. The prospect of falling US interest rates, a decline in the dollar and worries about America’s debt sustainability should lead to more institutional and retail money flocking into gold, in its physical form and through exchange-traded funds that track the commodity. There is even talk that the long-mooted new currency set up by the expanded Brics countries will be backed by a number of assets, including gold.
A century on from the demise of the Gold Standard, which collapsed in the interwar years amid a breakdown in central bank co-operation over how to manage the metal, gold is quietly becoming a more important feature of our financial system rather than an outmoded 20th-century relic. However, in a far cry from the multilateral system of global gold-backed currencies, the metal is now the choice tool to protect nations against financial warfare waged by the world’s hegemon. It may yet play some part in a potential currency alternative that fractures, rather than unites, the modern financial system.
Mehreen Khan is Economics Editor of The Times