The Golden Surge: Unpacking the Reasons Behind Gold's Recent Price Increase

For centuries investors have invested in gold in pursuit of various purposes depending on individual financial goals and market conditions. Traditionally thought of as a safe-haven asset, owning gold on occasion has produced attractive returns. The price of gold has risen by about 13% in the first four months of 2024 and by over 80% in the past five years.

Gold tends to become more attractive in times of instability, when investors pile into safe-haven assets as a hedge against the economic climate, geopolitical tensions or inflation. When central banks maintain low interest rates or engage in expansionary monetary policies such as quantitative easing, investors may turn to gold as an alternative store of value.

Central banks around the world have been aggressively buying gold in recent years and hold significant gold reserves as part of their official foreign exchange reserves. Central banks collectively bought more than 1,000 tons of gold for each of the past two years — a pace unprecedented in modern history. Last year, central bank gold buying fell just 45 tons short of 2022's multi-decade record. According to the World Gold Council, central banks net gold purchases totaled 1,037 tons in 2023.

In a world where U.S. hegemony can no longer be assured, it makes sense for central banks to diversify away from the dollar, which has historically made up the bulk of their reserves. Gold is a natural beneficiary of that move. After the EU and US slapped Russia with sanctions, which included freezing its central bank's foreign reserves, it made many central banks rethink on the kind of reserve assets they should be holding. Physical gold cannot be confiscated or subjected to sanctions once it is housed in a local vault.

A few months into 2024 the world seems no less uncertain and those reasons for owning gold are as relevant as ever. The wars in Ukraine and Gaza have helped spike the price of the precious metal to new highs. China has been purchasing large quantities of gold to diversify its holdings away from U.S. dollars amid tensions with America. Yet, despite being the largest buyer of gold this year, China's gold reserves only represent 4.33% of its foreign reserves.

The themes underpinning central bank demand remain in play, and have in some cases intensified. Current conditions will likely keep central bank demand well supported in 2024.

Should investors own gold?

Ultimately, the decision to invest in gold should align with an individual's investment objectives, risk tolerance, and overall financial strategy. For much of the 1980s and 1990s, the price of gold was relatively flat and long-term gold investors experienced virtually no price appreciation.

Gold can help diversify an investment portfolio by providing a hedge against the volatility of other asset classes such as stocks and bonds. Its price movements often have a low correlation with traditional financial assets, which means that when other investments decline, gold may hold its value or even appreciate.

Gold has also been a popular hedge against inflation. When the value of fiat currency decreases due to inflation, the price of gold often rises, preserving the purchasing power of investors. During times of economic uncertainty or geopolitical instability, gold is often perceived as a safe-haven asset. Investors may flock to gold as a store of value and a hedge against financial market turbulence.

Some investors are attracted to gold for its potential for short-term price appreciation. They may engage in gold trading or invest in gold-related financial products such as gold ETFs (exchange-traded funds) or gold futures contracts.

Owning physical gold itself typically does not produce income in the form of interest or dividends. Unlike stocks, bonds, or real estate, gold is a passive asset that does not generate cash flow on its own. However, investors can profit from gold by selling it at a higher price than the purchase price, thus realizing a capital gain.

Before investing in gold, investors should understand the unique characteristics related to owning physical gold. Unlike financial assets, gold comes with storage costs, including fees for secure storage facilities or insurance premiums. These costs can eat into potential returns and should be considered when evaluating the overall profitability of gold investments.

While gold is generally considered a liquid asset, buying and selling physical gold can be less liquid compared to trading stocks or bonds. Investors may face challenges in quickly liquidating their gold holdings, especially during times of market stress or if they hold large quantities of physical gold.

It is also worth noting that the price of gold can be volatile in the short term. Investors should be prepared for fluctuations in the price of gold and have a long-term investment horizon to mitigate the impact of short-term volatility. Also, with the rise of advanced technology, counterfeit gold products have become more sophisticated. Investors need to be vigilant when purchasing physical gold and ensure they acquire it from reputable sources to avoid counterfeit risks.

Some gold coins or bars may have numismatic value in addition to their intrinsic metal value. Numismatic coins, especially rare or collectible ones, can command higher premiums but may also be subject to greater price volatility.

Bottom line . . .

Gold has a long history of preserving wealth during times of economic uncertainty, market volatility, and geopolitical instability. Its intrinsic value and limited supply make it a reliable store of value. While owning gold can provide benefits during uncertain times, it is important for investors to manage their exposure and not over allocate to gold. Diversification across different asset classes is key to building a resilient investment portfolio.