Historically, the most important variable for the gold price has been the real interest rate, because that represents the opportunity cost of holding this precious metal. Unlike bonds or shares, investors do not receive any income from their physical gold investments. Real interest rates are at about the highest level since the financial crisis, so the question arises: Why is gold gaining ground?
There are four reasons that support the rally. The most frequently cited reason for the increase is the expectation among investors that the Fed will soon lower the policy rate (and thus the real interest rate). That makes gold relatively more attractive.
The weaker US dollar also appears to be supporting the good results. Gold is often priced in dollars, meaning the weakness of the USD gives non-US gold buyers more purchasing power. The euro has appreciated about 2.6 percent against the US dollar since the end of September 2023, while the Chinese yuan is trading 1.2 percent higher.
However, many analysts are not satisfied with these two explanations, after all, the gold price rose more than 18 percent over this period and previous favorable developments regarding expectations regarding real interest rates have not always been accompanied by a rally in the recent past. The same can also be said about the protection that gold typically provides during times of geopolitical turmoil (especially for those directly affected). Gold performed strongly at the start of the conflict in Gaza, but the next rally to the upside came without an escalation of the conflict to the broader region.
A final explanation is the demand from central banks and (to a lesser extent) wealthy individuals in emerging countries for physical gold. Sanctions against Russia and its oligarchs have made several parties think twice about keeping their reserves. Gold has served as a store of value for hundreds of years and can also be held outside the financial system. There was somewhat of a shift in the BRICS countries, from buying US dollar government bonds to central banks buying gold. Although this may not immediately affect the dollar as a reserve currency, small shifts could have an impact on the gold price itself.
Moreover, the interest from private investors, especially in the east, remains difficult to map and may well be higher than initially thought. Chinese, but also Vietnamese, for example, often keep their savings in gold and real estate. The latter category is under pressure in both countries and the longer that situation continues, the better the prospects for gold.
Time for a correction?
Still, many analysts are scratching their heads, because a rally in gold often needs a new catalyst to maintain its momentum. Moreover, gold funds have been confronted with outflows in recent months and investors currently appear to have little confidence in the management of mining companies that extract gold. All this seems to make the market vulnerable to a short-term correction.
European investors withdrew almost €7.2 billion from precious metals funds over the last six months and €10 billion over the last year. Total assets amounted to more than 91 billion euros at the end of February 2024. The funds within the precious metals share category, which mainly invest in miners, also saw an outflow of approximately 636 million euros over the last six months. Total assets amounted to 11.6 billion euros.
The largest gold mining ETFs available in Europe such as iShares Gold producers ETF USD Acc and VanEck Gold Miners lost around 12-14 percent of their value over the first two months of this year. Newmont Corp and Barrick Gold Corp, two bluechips, have lost 23 percent and 17.4 percent of their value respectively so far this year.
Last word for the goldbugs
Gold has performed quite well over the past 20 years, but volatility has also been relatively high. It has a long history as a safe haven with its price largely independent of other asset classes and is mainly seen as an insurance policy against major financial turmoil.
The current fiat financial system is built on trust in our institutions. Gold, on the other hand, is not dependent on the behavior of others and, according to its proponents, primarily functions as protection against a collapse of the financial system or serious political instability. After all, there is no insurance contract for such events within the system and that is why central banks still hold gold.
The Top 5
The top five consist of ETC funds that invest in physical gold, so it is not surprising that their returns are close to each other. ETC stands for Exchange-Traded Commodity and is a security that offers investors who do not have direct access to the spot or derivatives markets for commodities the opportunity to invest in them. These ETCs therefore try to follow the spot price of physical gold as closely as possible.
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