Fresh record high

Gold managed a fresh record high above $2,500 this week, which provoked a slew of commentary arguing either that the precious metal is now overvalued or that it has further to go. In truth, no-one can provide unassailable proof for either position. In any case, buying gold in the hope of making a quick profit is unwise - gold is a useful, perhaps the most useful portfolio diversifier. And with Glint gold has been returned to its historic role, as a form of money that can be used in everyday life.

But if you buy gold as an investment you really want to know whether your investment is likely to lose value or not. On that basis there are good reasons to think that gold is indeed headed higher in Dollars, Yen, Euros or Pounds Sterling. In the past 12 months gold has risen in price by 28%, 28%, 25% and 29% respectively. This compares with the 32.44% rise in the Nasdaq Composite Index, or the 22.15% rise in the S&P 500, both in the last 12 months. Gold has its cheerleaders, who now are forecasting $3,000/oz, $4,800/oz, even $10,000/oz. The past cannot dictate the future of course; there's no guarantee the meteoric recent rise in gold's value will endure.

Yet the past can hint at what might be coming. The whales of the gold market - central banks - may not buy as much gold as in the last two years, when their purchases rose above 1,000 tonnes a year, but they will still be a significant factor. The World Gold Council's (WGC) Central Bank Gold Reserves survey earlier this year found that almost a third of those 70 central banks who responded said they plan to increase their gold reserves in the next 12 months, the highest number since the survey started in 2018. Official gold reserves increased by 290 tonnes in Q1 of this year, the largest first-quarter increase since at least 2000 and 69% higher than the five-year quarterly average according to the WGC.

Minnows join the party

Now it appears that the whales are being joined by smaller fry. In India the government slashed import duties on gold in July, cutting them from 15% to 6%, giving cheer to jewelers and their customers alike. India's gold imports earlier this year were looking relatively dismal, but the lower cost of gold should pump up imports. In China, where the spot gold price has risen by 21% so far this year, new gold import quotas have been issued by the central bank. Although demand may remain subdued because of record gold prices, the piteous state of the real estate market (property investment dropped more than 10% in the first half of this year) means that Chinese are interested in investing in an asset that has proved itself reliable in the long-term.

But the strongest support for higher gold prices remains what might happen to US and other interest rates. In the US, anecdotal evidence suggests that family offices are buying gold against fears about the fast expanding US debt levels and the country's worsening fiscal position, the failure of tax revenues to cover federal bills. The closer we get to September the more frenzied markets will become, as investors position themselves for much-anticipated interest rate cuts by the US Federal Reserve. The European Central Bank (ECB) cut its interest rate in June from 4% to 3.75% and is widely expected to cut further at its next meeting in September. The Bank of England cut its key interest rate at the start of August to 5%. These cuts came despite inflation remaining well above the annualized 2% target for inflation set by the central banks.

The club gathers

Central bankers are nervous creatures, perpetually worried that their tinkerings with interest rates may not be enough to stave off uncontrolled inflation or may be too much and bring about economic recession. That dilemma will no doubt be the subject of the latest annual gathering of the central bankers' club at Jackson Hole in the US state of Wyoming. On Friday morning this week the chairman of the US Federal Reserve, Jerome Powell, will give the keynote address. Investors will want to hear him give a thumbs up - no matter how codified - to an interest rate cut in September. If they don't hear that then expect a generalized decline in equities and other assets, including gold.

Powell is traditionally tight-lipped and he may be especially so this weekend. He will be especially conscious of 2024 being a year in which one of two very different candidates will hope to become President in 2025. One espouses deregulation, a weaker Dollar, a reversal of 'green' technology and its astronomic costs; the other is likely to raise taxes and boost unfunded public spending, relying on America's ability to borrow in international markets, and tougher regulation of prices, rents and other consumer concerns. Lower interest rates will weaken the Dollar, pushing the Dollar price of gold higher. Political uncertainty and division provide the background context, the logistics behind a high gold price; lower interest rates are the spear-carriers for gold's advance.

At Glint, we make every effort to demonstrate a balanced conversation between gold, crypto and fiat currencies when it comes to purchasing power and, while we strongly believe that gold is the fairest and most reliable currency on the planet, we need to point out that it isn’t 100% risk free. While we have seen a steady increase over time, the value of gold can fall, which means that its purchasing power can also decline.