Gold has surged by around +30% since autumn 2023, with peaks that were not easily tied to specific events. Various factors have contributed to this rise, away from the post-global financial crisis era.
Key points
- Gold has risen about +30% since fall of 2023 through a series of spikes, some of which were not easy to connect with specific events or fundamentals. A combination of factors actually played out. Essentially, the rise in gold could signal a transition to a new phase of the economic cycle that might not look the same as the post-GFC era that has prevailed so far.
- For now, markets remain busy assessing when central banks will start to cut rates. Beyond temporary doubts regarding the pace of disinflation, they are pricing that rates being held at elevated levels for a while longer will ensure that the economy returns to normal.
- The surging gold price appears to disagree. With rates structurally higher than in the last decade, a shallow ‘repair phase’ looming in the absence of any serious economic dislocations, an end to the China-led global trade expansion, and shorter economic cycles will all be sources of continued uncertainty, calling for hedges.
- The uncertain medium-term inflation equilibrium, in a tug of war between inflationary pressures (including stalling globalisation and ballooning debt) and deflationary factors (including AI driven productivity and below-par economic growth), will also require hedges.
- Additionally, waning confidence in fiat currencies and a growing defiance against the dollar are supporting gold. Though a major currency crisis looks unlikely in the near term, profligate fiscal policies and diversification away from dollar transactions will steadily draw new fans to gold.
- A structural rise in geopolitical risk and domestic instability will also lead investors to rethink portfolio diversification – aiming to factor in a greater variety of risks with uneven timeframes, amid scarcer liquidity, richer valuations, crowded allocations. Gold will be part of the solution.
- Because of its liquidity, diversification features, appeal as an investment and to mitigate the implicit portfolio exposures to fiat currencies, gold will likely be granted a higher allocation.
