Gold price has been on the rise amidst a landscape of economic uncertainty and heightened market volatility, reaching an all-time-high of around $2,430 in April 2024.
What has been driving the uptrend in gold price?
Is there further room for returns if you invest in gold?
What considerations should investors bear in mind when deciding whether to allocate more cash towards gold investments?
Gold’s Value in the Marketplace
Gold’s price depends on its demand and supply.
Across cultures and civilizations, gold has retained its value and holds profound symbolic significance, representing wealth, prestige and stability.
Its lustrous sheen and elegance have made it a prime choice for crafting exquisite jewellery pieces.
Unlike other metals prone to tarnishing or corrosion, gold retains its brilliance and allure through generations, ensuring that cherished heirlooms remain as radiant as the day they were crafted.
Gold is also widely used in industrial applications, with its strong electrical conductivity facilitating the seamless transmission of electrical signals across a myriad of electronic components, from printed circuit boards and connectors to switches and contacts.
Whether employed in microelectronics or nanotechnology, its low resistivity and ability to withstand extreme temperatures and environmental conditions make it indispensable in ensuring the reliability and performance of electronic devices.
Apart from its role in jewellery and electronics, gold has long been seen as an asset that is durable which can serve as a store of value ideal for long-term investment.
What affects Gold Price for Investors?
i) Gold as a Safe Haven Asset
Within the realm of investments, few assets possess the timeless allure and enduring value of gold.
In times of economic turbulence, investors often seek refuge in low-risk tangible assets, and gold has historically been the safe haven asset investors flock to.
Amidst geopolitical tensions, trade disputes, and the resurgence of inflationary pressures across the past 2 years, the appeal of gold as a store of value has intensified, enabling its price to soar to new heights.
For example, when the Russia-Ukraine war broke out on 24 February 2022, gold’s price soared from $1903 to around $2050 within 2 weeks.
More recently,when the Israel-Hamas war broke out on 7 October 2023, gold’s price soared from just around US$1,850/oz at the end of September 2023 to $2,430 by April 2024.
Looking back at 11 September 2001, gold price rose by 6.2% in a single day when the 9/11 terrorist attacks occurred.
If you think World War 3 may happen eventually as predicted by Nostradamus, you may want to consider adding gold to your portfolio to safeguard against any market volatility.
To read more about how to invest during wars and economic crises, read our article here:
How to Invest during War | World War 3 Nostradamus Prediction
ii) Inflation & Central Banks’ Policy Impact
Gold has long been regarded as an effective hedge against inflation, with its ability to retain value across centuries.
As the prices for goods and services rise across time, the price of gold also increases simultaneously, allowing gold investors to protect the value of their investment portfolio against inflation.
Across the recent years following the outbreak of the COVID-19 pandemic, inflationary concerns have resurfaced amid supply chain disruptions and robust fiscal stimulus measures, driving more investors to turn towards gold to safeguard the real value of their wealth.
For example, inflation in the United States hit a fresh 40-year high in June 2022 as consumer prices rose 9.1% compared to the previous year, while inflation in the UK hit a 41-year high in October 2022 with an annual price increase of 11.1%.
Looking at gold’s performance from January 2022 till April 2024, it rose from $1,800 to the most recent all-time high of over $2,430 (a gain of +28%) amid persistent inflation and rising geopolitical instability.
To bring down inflationary pressures, many central banks globally such as the US Federal Reserve, Bank of England and European Central Bank have resorted to raising interest rates.
When inflation rate is high, central banks will raise interest rates to increase borrowing costs, making it more expensive for businesses and consumers to borrow money thus leading to a drop in business investment and household consumption.
As demand declines, price levels will fall which will reduce inflationary pressures.
Another important concept important to investors is that gold has an inverse relationship with interest rates.
For the United States, interest rates were raised to a 23-year high of between 5.25%-5.50% as the US Federal Reserve sought to combat inflation.
This strengthened the US dollar as investors shifted their capital away from other currencies to USD.
The higher the interest rates in US, the higher the returns you can get if you invest money in a USD savings account, compared to the returns from a savings account in another country with lower interest rates).
Gold does not pay any interest income to investors.
The high-interest-rate environment between 2022 and first half of 2024 should cause USD savings account and USD-denominated fixed-income instruments to appear more attractive than gold, which should theoretically reduce the demand for gold.
However, gold price has been able to not just hold its ground amid a high interest-rate environment during 2022-2024, but demonstrated its ability to climb higher to new heights as well.
This shows that the global demand for gold remains strong as the general economic outlook remains uncertain.
When inflation eventually falls, central banks would then shift their monetary policies from a tight stance (where they increase interest rates to lower prices) to a loose stance (where they reduce interest rates).
This would be bullish for gold as its attractiveness as an investment would increase relative to fixed income assets.
Investors and traders globally are anticipating that interest rates may be cut by 2H 2024.
iii) Central Banks are Buying More Gold
The United States holds the world’s largest stockpile of gold reserves (an amount that roughly equals the total sum of gold reserves held by Germany, Italy, and France – the next 3 largest gold-holding countries).
In the recent years, several countries have been busy adding to their gold reserves. According to Bank of America data, China, Poland and Singapore accounted for the largest amount of central bank gold purchases in 2023.
Dedollarization has been on the rise lately, as countries seek to reduce their reliance on the US dollar as a reserve currency, medium of exchange or as a unit of account, threatening the US Dollar’s position as the global reserve currency.
China has been increasing its gold reserves in consecutive months as its feud with the US continues, with an increased stockpile of 225-tonnes of gold in 2023 marking China’s largest increase in gold holdings since 1977.
As of Q1 2024, its gold reserves stood at 2,264 tons, compared to to 2,235 tons in Q4 2023.
China’s Gold Reserves:
Its ally, Russia, has also been increasing its gold reserves since the past decade, although new purchases have slowed down since 2020.
Russia’s Gold Reserves:
Does the continuous increase in gold purchases signal that China and Russia have both been preparing ahead for the stand against the West since the past decade?
There have been speculations suggesting that China and Russia might be collaborating to introduce a new currency backed by gold, with the aim to diminish the dominance of the US dollar as the primary reserve currency.
If you want to protect your portfolio against dedollarization in the new economic era, then you should consider to add gold to your portfolio too, like what China and Russia have been doing.
iv) The Rise of Gold-Backed Digital Currency
A digital gold currency is an electronic form of money that is backed by gold reserves held by an entity.
As more countries move towards dedollarization, the rise of gold-backed digital currencies has been observed.
For example, in early April 2024, Zimbabwe issued a gold-backed digital currency known as Zimbabwe Gold (ZiG) in an effort to fight against inflation.
This is backed by Zimbabwe Central Bank’s gold reserves (amounting to 2.5 tons of gold reserves), and will be used as legal tender alongside the Zimbabwean dollar and bond notes.
Should more countries introduce their own gold-backed currencies as a strategic shift away from the US dollar, the demand for gold and thus gold price would rise substantially.
Investing in Gold – Considerations
i) Returns of Gold Investment
Gold’s price has been growing over the past 20+ years, albeit with a dip between 2013 and 2019.
The annual returns for the past decade are shown in the table below (source: Macrotrends):
Looking back over a longer period of time, data by Curvo shows that gold has recorded positive annual returns (in green) for a majority of the years between 1979 and 2023.
The highest annual return was recorded in 1979 (a gain of 120″%) during the high inflation era in US, when year-on-year inflation ran above 11%.
Its worst performance was in 2013, when gold price fell dramatically due to a slowdown in net gold purchases by central banks. The strong US dollar during that period was another factor that negatively impacted the demand for gold.
ii) Gold’s Role in Portfolio Diversification
While gold’s returns may not be superb compared to stocks and cryptocurrencies, they are much less volatile in nature and can be a good hedge against economic downturns.
It tends to move in the opposite direction of higher-risk assets in times of market crashes or wars.
As such, gold as a safe-haven asset can be viewed as a component of a well-diversified investment portfolio, rather than a standalone investment.
By allocating a portion of their portfolio to gold, investors can mitigate risks and enhance overall portfolio resilience.
Robert Kiyosaki, the author of “Rich Dad Poor Dad”, has long been a proponent of gold with his encouragement to investors to stack up their holdings of gold, silver and Bitcoin to welcome the era of dedollarization.
Thus, holding gold can be a way to safeguard your portfolio from the shift towards a new economic era where new economic superpowers arise to contend against the United States.
Note that investors should also take note of their own investment horizon in determining the suitability of gold within an investment strategy.
While gold can serve as a reliable store of value over the long term, short-term fluctuations in gold prices can be influenced by a myriad of factors, including investor sentiment and macroeconomic trends.
A long-term investment horizon would be a safe bet for gold investors.
How to Invest in Gold
Gold can play a role in any diversified portfolio with its ability to hedge against inflation and geopolitical risks.
You can own physical gold directly by purchasing gold bars from a gold dealer or a bank, or buy gold jewelery.
Recently, Costco supermarket in the US has also started selling physical gold bars which sold out quickly (with monthly sales exceeding $200 million worth of gold bars).
However, note that buying physical gold would mean that you need to pay for the transport/shipping costs, as well as insurance and storage costs should you decide to keep it in a vault.
Alternatively, you can gain exposure to gold through other investment vehicles such as gold exchange-traded funds (ETFs) (eg. SPDR Gold Shares ETF with ticker GLD), gold mining stocks, and gold futures contracts.
If you would like to invest in gold ETFs or gold mining stocks listed in US/Europe, you can sign up for a FSMOne brokerage account and choose the ETF or stock that you prefer.
✅ Open a Brokerage Account – Invest in Global Stocks, ETFs, Unit Trusts & more:
Register for FSMOne USD Savings & Investment Account
For Malaysians, you can also invest in gold easily through a gold-focused fund through the Versa investment app. The Versa Gold fund tracks the performance of gold, so you can enjoy the appreciation in gold price without physically owning the gold.
✅ Open a Versa Investment Account – Invest in Gold, Malaysian REITS and Funds:
Register for Versa Investment account (open with mobile app)
If you would like to sign up for Versa, use this link above to enjoy a FREE RM10 cash reward!
Once you downloaded Versa from the Apple iTunes store or Google Play Store, simply register for an account, select the Versa Gold fund within the app and deposit a sum of money to invest in gold.
Conclusion
Overall, gold is a stable and low-risk asset that can play a significant role within an investor’s portfolio.
As gold continues its ascent amidst a backdrop of economic uncertainty and market volatility, it may be a good choice to add some gold to safeguard your portfolio from external risks.
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Disclaimer: This article is purely for education and does not constitute any investment recommendation. The information presented incorporates research and analysis from publicly available materials. Investors should ultimately make their own investment decisions.
