The spot price for gold has crossed $2,500/oz. for the first time in history, rising by $700/oz., or 40%, over the last 10 months. Gold prices have never before risen so far so fast. This leads me to two questions: Why? And will this rally continue?
Prices are determined by two forces: supply and demand. Let’s look at demand first.
Extraordinarily strong demand for gold has been coming from four sources.
One is war. The current rally began with the Hamas attack on Israel last October. That conflict has now spread to Yemen, Lebanon, the Red Sea, Iraq, and Iran. And the United States and our allies have been drawn into that tinder box.
Conflict is also spreading and intensifying in Europe. Russia’s war on Ukraine is in its third year, and for the first time since World War II, foreign troops occupy Russian territory. Russia’s European neighbors are all preparing for conflict, from Finland and the Baltic States to Poland. And NATO is moving forces eastward to be better positioned.
Then there’s China, which is becoming more aggressive toward Taiwan and the Philippines. As a result, Japan, South Korea, Australia, and Vietnam are aligning more closely to the United States.
And there’s the ever-present nuclear saber-rattling from North Kore
Since I do not expect peace to break out in any of these theaters, I expect geopolitical worries to build and gold prices to rise.
The second source driving this rally has been speculation about what the Federal Reserve will do on interest rates—and when.
As expectations for rate cuts have ebbed and flowed, gold prices have risen and stalled. Now the signals are lining up that cuts are coming in September, with more later this year and in 2025.
Falling interest rates boost gold prices by eroding the appeal of Treasury bills as competition to gold and by lowering the value of the dollar. A weaker dollar makes gold cheaper for the vast majority of global gold buyers, who trade in currencies other than the dollar.
I expect these monetary forces to continue to support rising prices for at least another year or two.
The third source driving gold demand is central banks.
One bank in particular has been the primary buyer: the People’s Bank of China (PBC). Over the past two years, the PBC has been buying gold with a vengeance. It’s doing so for two reasons.
First, the PBC’s portfolio is unbalanced, and it needs to be diversified. Gold has been the way the central bank has done that.
Secondly, China sees how the West has used the dollar to punish Russia, Iran, and North Korea, and they’ve decided to insulate themselves from that leverage. Again, gold has been the means of doing that. I expect this trend, too, to intensify as tensions with the West rise.
The PBC has enormous reserves with which to buy gold. Only 4.5% of its assets are in gold. The nation with the economy most similar to China’s is India, and 9.5% of its assets are in gold.
China has reason to hold more gold than India, but simply matching India’s allocation would have a huge impact on gold prices.
The fourth major source of gold demand comes from the people of China.
Jewelry and investment demand has skyrocketed as consumers have bought gold as protection from crashing Chinese real estate and stock market values. Gold has been one of the few safe havens available to them.
The Chinese economy is in deep trouble, and I don’t expect a recovery anytime soon.
These four main demand forces working in the gold market today all point to rising prices for the foreseeable future.
What about the supply side?
It comes down to mine production and whether it will rise to meet demand. The short answer is “no.”
How can I be so sure? Because over the past decade, mine production has barely budged while gold prices have doubled. Why haven’t miners ramped up to take advantage of higher prices?
Gold used to be largely mined in countries that were politically stable and friendly to the United States. No longer.
Gold used to be found in more convenient locations. No longer.
Countries used to give miners free rein to mine as they wished, without environmental and labor constraints. No longer.
So gold is harder to find and more expensive to mine. Miners must recover those costs, so they raise prices. When prices rise for newly mined gold, the market price for the gold you own—or could have owned if you had bought, say, six months ago—rises too.
Gold is not going to get less expensive to mine; it will only become more expensive.
So it’s not too late to get in on this rally. Now is the time to add gold to your portfolio or increase your portfolio’s allocation to gold.
