Gold is currently trading around $2,375 per ounce, just below its recent all-time high of $2,450 per ounce. Gold prices historically rise when inflation is increasing, when investors are looking for a safe investment in anticipation of a recession or because they fear the dollar is weakening.
Yet none of these conditions seems to hold. After all, inflation is falling (albeit not yet to the 2% level the Federal Reserve would like), the economy is growing and the dollar is strong. So why is the yellow metal on the rise?
Our view is that changes in supply and demand are a major reason for gold’s advance.
Over the last two years we have seen increased demand for gold from the central banks of emerging and advanced economies. Central banks have looked to diversify their holdings through alternative currencies and assets, especially after the U.S. and Europe seized Russian currency reserves following its invasion of Ukraine. The move into gold can also be seen as a hedge against geopolitical risk, something that’s been on the rise of late.
While emerging market central banks have been diversifying away from dollar-based assets since the Global Financial Crisis, developed countries’ banks are just beginning to do so. And the numbers suggest this trend is set to continue.
The move into gold can also be seen as a hedge against geopolitical risk, something that’s been on the rise of late.
In a recent central-bank survey conducted by the World Gold Council, an industry trade group, almost 60% of developed-country respondents said they believed gold’s share of global reserves will rise over the next five years. That compares to 38% from last year. In the same survey, 13% of developed-country respondents said they will increase their gold holdings over the next year, up from 8% last year. Some 56% of developed-market respondents, up from 46% last year, think the dollar’s share of global reserves will fall further over the next five years. Among emerging market central banks, 64% hold this view.
Nor are central banks the only big buyers of gold. In China, following some difficult years in domestic markets, retail buyers are becoming less interested in traditional investments such as property and equities. Gold’s role as a store of value has found favor instead.
Figure 1: Gold's gains vs. the dollar
Figure 2: VIX vs. Gold
What does all this mean for the international investor? The dollar’s share of global foreign exchange reserves has declined from 71% in 2000 to 58% at the end of 2023, and gold reserves both in dollar terms as well as weight in ounces have risen markedly in recent years. Given this, it’s unclear whether an all-eggs-in-one-currency-basket approach still make sense.
If, after a decade of relative strength, the greenback does continue to weaken, it may be time to diversify. Could an allocation to international equity be the hallmark of a rational response to the rise of gold?
Learn more about our views on International Equities.
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