Three general areas impacting the economy are driving the price of gold to record levels that are continuing higher almost every week. First, central bank policies have encouraged risk-taking and speculation by intervening and resolving issues whenever an economic problem arises. Also, central banks have been accumulating gold in the face of geopolitical tensions and wars. Investors are seeking high-return assets in anticipation of interest rate cuts expected later this year. As a result, they’re turning to gold as a safe-haven investment. Experts believe that concerns over inflation and anticipated interest rate cuts by the Federal Reserve central bank have further boosted gold prices.
Central Bank Policies
Central banks have been purchasing gold to hedge against inflation risks and move away from U.S. dollars. Rising geopolitical conflicts in the Middle East and Eastern Europe have also contributed to gold’s surge. They anticipate changes in the international monetary system and worry about rising economic risks in reserve currency economies, of which the U.S. dollar remains the dominant world reserve currency, though its place has slipped from 71 percent in recent years down to 59 percent today.The country with the largest gold reserves is the United States. Our gold reserve stands at 8,133 metric tons, valued at almost $0.5 trillion, which is nearly as much as the combined total of the next three countries with the largest gold holdings: Germany, Italy, and France. Gold is an important component of central bank reserves due to its safety, liquidity, and return characteristics. Central banks hold around a fifth of all the gold ever mined throughout history. China currently holds gold reserves estimated at 1,948 tons. This places China as the sixth country with the most gold reserves.
Rising National Debt
Secondly, debt has risen to world-war levels, threatening the U.S. dollar currency and the U.S. Treasury bonds, as the risk of default increases with our rising mountain of national debt we need to service with rising interest payments. For currency risks companies often use financial instruments such as currency futures, swaps, or options to hedge against this risk. Recently, however, gold has become the hedging instrument of choice as the dominance of the U.S. dollar among and across world reserve currencies is being challenged. BRICS (the BRICS group of major emerging economies—Brazil, Russia, India, China, and South Africa) are seeking to develop alternatives to the U.S. dollar through the accumulation of gold and trade transactions using other foreign currencies.
Federal Debt: Total Public Debt FRED Economic Data, St. Louis Federal Reserve
Speculation
Finally, ever since the pandemic and the waves of trillions that were provided courtesy of monetary and fiscal generosity, speculation has gone up markedly. Staying at home with stimulus checks and forgivable PPP loans meant speculating on crypto, NFTs, meme stocks, and tech becoming a popular trend, so popular in fact that it gained strong momentum over the 4 years since it started. As momentum grew, prices continued to go up, reinforcing the speculation while luring others into what looks almost like a gambling casino today. The so-called “momentum trade” keeps pushing gold prices higher. When investors see the price of gold rising, they want to share in the gains, leading to increased demand that feeds upon itself.So much liquidity was injected into our economy beginning with the pandemic in March 2020, that both asset and price inflation became serious economic issues. Asset values went way up, enriching the wealthy who own most of the assets. Price inflation, however, made daily lives even more challenging for the majority of Americans living paycheck-to-paycheck, struggling to pay rent, food, and other living expenses.
FRED: M2 Money Supply Board of Governors of the Federal Reserve System
Should you invest in gold? Gold doesn’t pay interest or dividends, and in some sense is as much of a speculation as is crypto. But gold has been around a long time, is considered a store of value, used to make jewelry, and has industrial uses as well. Gold can be a solid investment for these reasons:
- Safe Haven: Many investors consider gold to be the ultimate safe-haven asset. When stock prices, bond values, or real estate markets experience sharp declines, gold tends to hold its value or even appreciate. Nervous investors often rush to buy gold during uncertain times.
- Inflation Hedge: Gold can act as a hedge against both inflation and deflation. Unlike bonds, gold doesn’t pay interest, but it becomes more attractive when interest rates decline. It is seen as maintaining its value over the long term despite inflation.
- Diversification: Owning gold adds diversification to your investment portfolio. It provides an alternative to traditional assets like stocks and bonds, which can help mitigate risk during market volatility.
- Geopolitical Uncertainty: As a global store of value, gold can provide financial cover during times of geopolitical and macroeconomic uncertainty. Its historical significance and scarcity contribute to its appeal as a long-term investment.
Keep these factors in mind when considering gold as part of your investment strategy.
The Epoch Times copyright © 2024. The views and opinions expressed are those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.
