Record gold run

The price of gold hit an all-time high of $2,450 per ounce in May 2024 and has delivered a return of 13% year-to-date due to increased geopolitical uncertainty and increased demand from investors. 

Senior Investment Analyst at Morningstar South Africa Michael Dodd said gold has unusually managed to sustain its upward momentum. 

This is because it is increasingly being seen as a way to protect against an equity market decline alongside its traditional role as an inflation hedge and whether including gold in a portfolio can improve long-term returns or risk-adjusted performance.

Gold reached an all-time high of $2,450 per ounce in May 2024 and has delivered a year-to-date return of 13.0% and a return of 19.5% over the past 12 months. 

Dodds said it is significant that the surge in the gold price from late 2022 to early to mid-2024 came during a period when market participants would not have expected it to rally significantly. 

Gold prices tend to be negatively correlated to real interest rates. The lack of cash flow generated from gold increases the cost of holding it as interest rates rise, and the asset does not produce anything.

Interest rates have risen significantly since the US Federal Reserve started hiking rates in March 2022 to tame rampant inflation. This has coincided with strong upward movements in the gold price, which is an anomaly.

Another interesting observation is that the recent rally in the gold price has coincided with a period of outflows from gold ETFs, which is evident from the red bars in the right chart above. 

The previous strong run-up in the gold price in 2019 and 2020 was supported by strong inflows into gold ETFs. However, the recent rally does not appear to be supported by gold ETF purchases.

These anomalies are shown in the graph below. 

The main factor behind the rising price of gold is the increase in geopolitical risks due to the ongoing wars, starting with the Russian invasion of Ukraine and then the outbreak of hostilities in the Middle East. 

This has driven the demand for gold, which is often viewed as a safe haven asset and has been compounded by macroeconomic uncertainty. 

A second factor is the unusually large central bank buying of gold, with over 1,000 tonnes of gold purchased, compared to the historical average of around 400 tonnes a year.

The most notable central bank purchases over the past 4 years appear to be coming from the People’s Bank of China, the Reserve Bank of India and the Central Bank of Turkey. 

The recent surge in central bank purchases of gold since 2009 and a rising gold price has grown the precious metal’s share of global international reserves. 

While the US dollar still dominates the share of global international reserves, gold has now surpassed the euro as the second most dominant portion.

This appears to indicate that the US dollar’s share of global international reserves is trending lower while gold’s share is increasing. 

The reduction in the share of global international reserves held in fiat currencies may be caused by declining trust in “credit assets” due to worrying asset bubbles, escalating sovereign debt, the breakout of major wars and inflation fears. 

This appears to be driving the continued demand for gold rather than fiat currencies, Dodds said.

He warned that the inclusion of gold in a portfolio is not guaranteed to improve risk, returns or risk-adjusted returns for every period based on historical evidence. 

Rather, the track record of the precious metal is mixed, and gold can go through long periods of underperformance. 

The strongest evidence for holding gold appears to be a safe haven in periods of significant market volatility. 

Morningstar’s view is that it should be viewed as an insurance policy rather than a core holding and should not make up a significant portion of a client’s portfolio due to its inability to deliver significant long-term real returns.


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