In an April 19 Barchart article on gold, I concluded:
The trend is always your best friend in markets, and gold’s bullish trend is now twenty-five years old. High interest rates and a strong dollar have not stopped gold’s rally, which is a significant sign that the strength of the precious metal’s bullish price action will continue. Even the most aggressive bull markets rarely move in straight lines. With gold over the $2,400 level and the critical psychological support at around $2,000, a pullback to that support would not threaten gold’s long-term bullish trend. Moreover, the dramatic shifts could support a continuation of higher highs in 2024.
Gold pulled back to the $2,300 level in late June, which could be a golden buying opportunity for the future but leave room to add on further declines.
Gold is a hybrid asset
Gold is a unique asset, part commodity, and part currency. Gold’s position as a means of exchange dates back thousands of years. It is a rare metal that has long been money with significant ornamental value.
The oldest gold coin in existence is the Lydian Salter or Lydian Lion, produced by the Kingdom of Lydia in modern-day Turkey and dating back to around 600 BC. However, the Old Testament of the Bible, written between 1200 and 165 BC, included 319 references to gold.
Throughout history, gold’s role as a currency took the form of coins and backing for paper currencies. Today, central banks worldwide own gold bullion as an integral part of foreign currency reserves, validating gold’s role in the global financial system.
Gold is also a commodity with many industrial and ornamental uses. Gold jewelry continues to account for a significant percentage of annual mine supplies. Gold is also required for electronics, computer and other technologies, and medical and dental applications, to name a few.
Investment demand is critical for gold’s annual fundamental supply and demand equation. Gold found a significant bottom in 1999 when the Bank of England auctioned half the U.K.’s reserves.
The long-term COMEX gold futures chart from to the 1970s shows the record low in August 1976 at $101 per ounce. Before legalizing gold futures, the U.S. fixed the price at around $35 per ounce from 1934 through 1972. In 1999, gold dropped to $252.50 per ounce before embarking on a quarter-of-a-century bull market that took the price to its most recent $2,435.80 high in May 2024.
A correction followed most new all-time peaks over the past twenty-five years. In late June 2024, gold was around $100 below the record level.
Shifts in the currency markets favor gold
The U.S. dollar has been the world’s reserve currency since the end of World War II, meaning central banks and countries have held the U.S. currency for cross-border transactions and savings. A reserve currency has value because of the stability and favorable credit of the government issuing the legal tender. The U.S. dollar and other reserve foreign exchange instruments are fiats that derive value from the full faith and credit of the governments printing the money.
In early 2022, a handshake between China’s President Xi and Russian leader Putin changed the economic and geopolitical landscapes. Russia’s invasion of Ukraine and trade tensions with China led the U.S. and its allies to level sanctions and tariffs on Moscow and Beijing. The sanctions and other trade barriers caused the Russians and Chinese to seek alternatives to the U.S. currency.
The BRICS countries are moving towards rolling out a BRICS currency with gold backing to challenge the dollar’s reserve currency status. In 2024, Saudi Arabia abandoned its 50-year petrodollar agreement, pricing crude oil in other currencies, including the Chinese yuan, Indian rupee, and others.
Shifts in the world’s currency markets will likely significantly impact gold prices. Historically, a strong U.S. dollar led to falling gold prices, while U.S. dollar weakness caused rallies. The relationship becomes far less influential as the world turns to other exchange instruments.
Central banks continue to increase reserves
Over the past few years, central banks, led by China and Russia, have bought gold to increase their reserves.
The chart shows China led the world in gold mine output in 2023, with Russia tied with Australia for the second-leading production. While China and Russia have been buying gold, along with other countries, the leading producers have likely vacuumed in domestic production, leading to even higher reserve hoarding.
The dollar’s demise as the world’s reserve currency creates more demand for gold, the ultimate means of exchange.
Falling interest rates should propel gold to new highs
While gold’s price has historically been a function of the U.S. dollar’s value versus other countries, U.S. and global interest rates have been a significant factor in the path of least resistance of gold prices. Rising interest rates tend to attract capital to fixed-income products while falling interest rates make alternative investments more attractive.
Commodity prices tend to rise and fall with interest rates as they change the cost of carrying inventories. Gold is an interest-rate-sensitive commodity that often moves higher when rates decline.
While the U.S. Fed left the short-term Fed Funds Rate unchanged at 5.375% at the June FOMC meeting, the ECB lowered its rates by 25 basis points. Meanwhile, the U.S. central bank began decreasing its quantitative tightening program in June 2024, taking upward pressure off rates further along the yield curve. The recent declines in inflation data suggest that the Fed’s next move will be a rate cut, favoring higher highs in gold, which sits only $100 below the record high.
Avoid rallies- Buying on dips has been the optimal approach
Since the turn of this century, every dip and correction in gold has been a golden, no pun intended, buying opportunity. With the bull market firmly intact in mid-2024, the trend is your friend, and higher highs in gold could be on the horizon for years to come. Moreover, the decline in the U.S. dollar’s role as the world’s reserve currency could turbocharge future gains.
Meanwhile, buying gold at record highs has caused investors more than a bit of indigestion over the past quarter of a century, as corrections can push prices substantially lower. Therefore, a scale-down buying approach, leaving room to add on further declines, has been optimal.
I believe the current correction since the May 2024 high is another in a long series of gold buying opportunities. However, picking tops or bottoms is dangerous as prices can rise or fall to irrational, unreasonable, and illogical levels. The world’s governments and central banks own gold as a leading asset, and the yellow metal should be an integral part of all portfolios. Gold is the world’s oldest means of exchange, and its position only increases in the current economic and geopolitical environment.
The most direct route for gold investment is the physical bars and coins available through many banks and dealers. The Gold SPDR (GLD) is the leading gold ETF and most successful commodity ETF product. GLD invests its assets in physical gold bullion.
At $215.06 per share, GLD had over $62.272 billion in assets under management. GLD trades an average of nearly 5.44 million shares daily and charges a 0.40% management fee. The ETF allows individuals and other investors to own gold in standard stock portfolios.
If the price action over the past twenty-five years continues, the current correction from a new record high is another buying opportunity.
On the date of publication, Andrew Hecht did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.