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If this year’s rally in the gold price shows anything, it is that the precious metal is no longer inextricably tied to the interest rate cycle. But that does not mean lower rates will have no impact: talk last week at the Jackson Hole symposium in Wyoming of coming cuts will give gold some extra shine.
Traditionally, gold is seen as a better investment when rates are low and when other asset classes are not up to much. By this token, it should have had a dim start to 2024 given the unexpectedly strong performance of US equities, the resilience of the economy, and a delay to expected Federal Reserve rate cuts. Yet it has risen 22 per cent this year, outperforming the S&P 500, and has recently crossed $2,500 a troy ounce.
Clearly, there were some buyers out there whose main concern was not the opportunity cost of holding gold. Enter central banks, which in the first half of the year bought 483 tonnes of the precious metal, says the World Gold Council. That is the highest amount since the body started collecting data. It is hard not to attribute some of this colossal buying spree to the Russia- Ukraine crisis, and in particular to the freezing of Russian central bank assets that occurred in 2022. That, predictably, sparked a desire in large emerging economies to shift away from the dollar.
While on a quarterly basis purchases will fluctuate — and indeed they were lower in the second quarter compared with the first — that looks like a structural tailwind for gold demand that is independent of everything else happening in the financial system.
Overlaying this trend is the traditional portfolio rotation into gold, which occurs when interest rates fall. Rich individuals and financial investors have been filling their vaults. Inflows into gold-backed exchange traded funds resumed in May, and July was the third consecutive positive month with inflows of $3.7bn. While this is cyclical, rather than structural, it does not look like it will turn anytime soon. The market whiplash this summer should also help drive interest in gold, insofar as it reawakens concerns about equity market volatility.
There is, of course, many a scenario in which the gloss comes off the gold trade. An acceleration in the equity market rally, higher-for-longer rates and declining geopolitical risk could all conspire to reduce demand for the metal. But, as it stands, the case for all of these appears to lack lustre.