Gold has broken all the counters this year, hitting one record high after another and reaching $2,772 an ounce during the week.
Since the beginning of the year the price of the precious metal has strengthened by almost 33%, beating the returns of Wall Street, including the technology Nasdaq 100, by about 10%.
And since the stock rally began in October 2022, gold has outperformed stock gains, returning 67% compared to the S&P 500’s return of about 63%, according to YCharts data.
With this performance on the board, it claims a place among the kings of investments, which distribute “hands-on” returns to those who chose to place their funds in gold or in investment products linked to gold.
The largest gold ETF, SPDR Gold Shares, with $78 billion under management, has seen inflows of about $5 billion over the past six months, according to ETF.com data.
The same goes for physical gold. Costco has been steadily selling out of gold bars since making them available on its website. Wells Fargo estimates that Costco sells up to $200 million in gold bars and silver coins to its members each month.
The gnawing of dollar dominance and the cracks in the global system
The returns of the precious metal made El Erian wonder in an article in the Financial Times what is happening to gold. He noted that gold’s persistent rise “reflects an increasingly persistent trend of behavior between China and the ‘middle power’ countries.” “There is also interest in exploring possible alternatives to the dollar-based payment system that has been at the core of the international architecture for some 80 years.”
He pointed out that what is at stake beyond the dethronement of the dollar is the gradual change in the functioning of the global system.
As it develops deeper roots, this risks fundamentally fragmenting the world system and eroding the international influence of the US dollar and financial system. This would impact the US ability to inform and influence outcomes and undermine its national security. It is a phenomenon that Western governments should pay more attention to. And it’s a place where there’s still time for a course correction, though not as much as some would hope, his article concludes.
Russia
Russia, which has been blocked by the US through heavy sanctions from the global system, has managed to avoid recession while at war. The International Monetary Fund (IMF) has revised downwards its forecast for Russia’s economic growth by 0, 2% to 1.3% in 2025 from 3.6% this year.
Russia’s ability to steer its de-dollarized economy away from a crisis could give other countries the confidence to reduce their reliance on the dollar, which ultimately benefits gold.
Putin himself, at the BRICS summit, raised the issue of a new international payment framework that would bypass the dollar. “We are not rejecting or fighting the dollar. But if we are not given the opportunity to use it, what can we do? Then we are forced to look for alternative solutions,” said the Kremlin strongman.
Geopolitical tensions
Gold is considered a safe-haven asset because of its long history as a stable store of value.
So when geopolitical tensions rise, investors tend to flock to the shiny metal, and right now there’s no shortage of reasons to worry.
From Russia’s war on Ukraine to escalating conflicts in the Middle East and China’s long-standing threat to Taiwan independence, geopolitical tensions are rising, not falling.
Additionally, the surge in US debt means that Treasurys—another historical safe-haven asset—may no longer be so safe.
Gold at the top of safe havens
The US debt is growing at a rapid pace, according to the latest figures it has shot up to 35.7 trillion. dollars, i.e. 2.3 trillion dollars from the end of 2023. The US Treasury will have to issue more bonds to service the debt and cover the deficit. The fiscal deficit will exceed 1.8 trillion. dollars for fiscal year 2024, up more than 8% from the previous year and the third highest on record.
This has helped weaken the historical correlation between bond yields and gold prices. While gold traditionally shines as an investment in a low-interest rate environment as it does not pay interest or dividends, high interest rates – in the US they are at their highest in two decades – have not weighed on the precious metal, which has been rallying with one record after another.
“Gold appears to be the last ‘safe haven’ asset standing, prompting traders, including central banks, to increase their exposure,” Bank of America said in a note this month.
Global central banks increased their purchases of reserves by 6% to 183 tonnes in the second quarter, according to the World Gold Council, and are on track to fully slow their purchases in 2024 to 150 tonnes from 2023.
Trump’s trade
The Trump trade, as it is called as the former president’s chances of winning the election have increased, and gold has been a big beneficiary.
This is because a possible Trump presidency is expected to be accompanied by a ballooning government deficit and a rapid increase in public debt, which would further lead to concerns about the recovery of inflation and the sustainability of the US dollar.
“If you’re worried about fiscal profligacy, economic repression and attacks on Fed independence, gold would be an attractive asset,” Capital Economics economist Davix Oxley said on Friday.
Even if Trump doesn’t win the election, the deficit is likely to widen, setting the stage for more gains for gold, according to Interactive Brokers chief strategist Steve Sosnick.
“It’s not like either candidate is preaching fiscal discipline, and the Fed seems willing to continue tapering even if inflation remains slightly above target. So there is the thinking that gold could be a viable alternative if interest rates rise and the economy remains healthy. “And if the economy isn’t healthy, it could still be a good store of value,” Sosnick told Business Insider.
SOURCE: ot.gr
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