What sparked the gold rush?
Gold has been on an unexpected and unprecedented bull run this year, throwing aside many of its usual correlations to continue its path upward. Gold is typically considered a ‘safe haven’ asset, a hedge during times of inflation and protection amidst geopolitical turmoil. So, what has driven the price of gold up 32% YTD and is it a cause for concern?
Is it something to do with inflation?
It is often said that gold is correlated with inflation, and thus when inflation is high and the US dollar is losing value, gold is beneficial, raising the commodity’s price accordingly. This is often stated as a simple fact; however, under the surface, the relationship is not so straightforward. For example, 2021 and 2022 saw some of the most rapid Consumer Price Index increases in decades, but the price of gold was largely moving sideways across this period. Evidence suggests that while inflation and the price of gold do sometimes move together, this is not always true, and one is not directly affecting the other.
Gold and Geopolitical Stability
One of the key buyers and sellers of gold are central banks, whose reserves account for roughly a fifth of all gold ever mined. Gold’s long-running safety is unmatched over time, making it massively important to central banks.
When Russia was booted from the SWIFT financial system and their reserves frozen following the Russian invasion of Ukraine in 2022, the precariousness of a US dollar-dominated system was put on display to powers like China and India. Gold buying by central banks has increased rapidly since then, with China increasing its gold purchases by more than 30% in 2023 and continuing into 2024.
War and Uncertainty
During times of war and uncertainty, currencies, markets, and assets tied to interest rates can experience extreme volatility. Gold, however, has historically remained stable enough through these volatile periods that a move towards war is essentially equal to a rise in gold prices. With increasing conflict in the Middle East and persistent sabre-rattling from major players watching on, investors have moved their funds towards a defensive position in the precious metal.
Further adding to the uncertainty is the upcoming US election, which could see a major turn in the Middle East but also a re-evaluation of trade relations with the US. Talk of tariffs on countries like China would likely see even more gold purchased as they further distance themselves from the US.
So should we be worried?
Assuming you haven’t invested your entire portfolio in gold, there should be no cause for alarm based on the price of gold alone. A well-balanced, diversified portfolio should be able to bear the brunt of a turnaround or stagnation in gold prices. While our ASX and US All Weather Portfolios have massively benefited from the upward trajectory of gold (ASX All Weather 24.23% YTD vs. the All Ordinaries at 7.67% YTD), gold does not hold a majority of the allocation in either, with the portfolios diversified across a variety of alternative assets.
