Gold's Record-Breaking Rally: A Safe Haven in Uncertain Times?
In a world gripped by economic and political uncertainties, the price of gold has soared to unprecedented heights, surpassing $4,000 an ounce. This surge in value has sparked a wave of interest and investment, but it's not without its controversies and potential pitfalls.
The current gold rush can be traced back to April, when US President Donald Trump's announcement of tariffs sent shockwaves through global trade. Since then, gold has experienced its biggest rally since the 1970s, with a remarkable 25% increase in value. But here's where it gets controversial: analysts believe this surge is not solely driven by Trump's tariffs.
The Safe Haven Effect
Gold has long been considered a safe haven investment, a refuge for investors during turbulent times. Its value is expected to remain stable or even increase during economic downturns or market volatility. And this is precisely what we're seeing now, with investors seeking secure places to park their money amid global uncertainty.
The spot price of gold, the amount you'd receive if you sold it over the counter, exceeded $4,011 an ounce on Wednesday morning in Asia. Gold futures, which indicate market sentiment, reached the same level on October 7th. These futures are agreements to buy or sell gold at a predetermined future date.
The Impact of the US Government Shutdown
The ongoing US government shutdown, triggered by disputes over public spending, has been a significant factor in gold's price surge. Christopher Wong, rates strategist at OCBC, described it as a "tailwind for gold prices." During previous shutdowns, investors have flocked to safe haven assets like gold, and this time is no different.
During Trump's first term, gold prices rose by nearly 4% during a month-long shutdown. However, Mr. Wong cautions that gold prices could fall if the shutdown ends sooner than expected, highlighting the delicate balance between political instability and market sentiment.
A Rally Beyond Expectations
Heng Koon How, head of markets strategy at UOB bank, described gold's rally as "unprecedented" and surpassing analysts' expectations. He attributes this rise to a weakening US dollar and an influx of non-professional buyers, known as retail investors, entering the gold market.
Gregor Gregerson, founder of Silver Bullion, a precious metals dealer and storage provider, has witnessed a significant increase in customers over the past year. Retail investors, banks, and wealthy families are turning to gold as a safeguard against global economic uncertainty, he says.
"Most of our clients are long-term holders," Mr. Gregersen explains, adding that the majority of his customers store their gold for over four years. He believes that while gold prices will inevitably fall at some point, the current economic environment suggests an upward trend for at least the next five years.
The Risks and Uncertainties
As Mr. Gregersen highlights, gold prices are not immune to dips. A hike in interest rates or a resolution to geopolitical tensions and political uncertainties could cause gold's price to drop. For instance, in April, gold's price fell by around 6% after Trump backed off from firing Fed Chair Jerome Powell.
OCBC's Mr. Wong cautions that gold is often seen as a hedge against uncertainty, but this hedge can be unwound. In 2022, gold's value plummeted from $2,000 to $1,600 an ounce when the US central bank raised interest rates to curb inflation triggered by the Covid-19 pandemic.
A key risk to gold's current rally is a sudden resurgence in inflation, which could prompt the Federal Reserve to raise rates, according to UOB's Mr. Heng. The recent climb in gold prices reflects expectations that the Fed will lower interest rates, making gold more attractive, says Mr. Wong.
Meanwhile, Trump's public criticism of the Fed and his attempts to fire Fed Governor Lisa Cook have added another layer of complexity. Mr. Wong suggests that this targeting of the Fed could "undermine confidence in its ability to act as a credible, inflation-targeting central bank." In such an environment, gold's role as a hedge against uncertainty "gains renewed importance."
So, what do you think? Is gold a reliable safe haven in these uncertain times, or is its current rally a temporary phenomenon? Share your thoughts in the comments below!
