Gold Is Breaking Records Once Again. Where Do We Go From Here?

Mar 19, 2024

If you follow the financial news, you probably know that gold has been on a tear recently. Setting and resetting all time record highs. Knowing why this is happening is crucial to understanding why this rally is just getting underway. So when did the gold rally begin and what set it off? It began last October 7th when Hamas attacked Israel. Over the next 15 trading days, the closing spot price of gold rose by $173 per ounce, or more than 9%. This illustrates one of the most powerful drivers of gold prices: war and geopolitical tensions. And so it has been since the beginning of history, gold has been, and is still today, the go to asset when war fears arise.

This price rally received a boost in early November, when new economic reports suggested the Federal Reserve could be ready to stop raising interest rates and might even consider cutting them in 2024. On that good news, gold surged $134 per ounce over the following 15 trading days. Prospects for lower rates produced another $96 Leap in December and a $85 surge in February. Why would falling interest rates boost gold prices? Two reasons. One, lower interest rates make low risk assets like U.S. treasuries less attractive for treasuries, and gold are considered the safest assets in the world. So when Treasury yields fall, demand for gold rises and prices follow suit. Two, when Treasury yields fall, global demand for treasuries falls too, which causes the value of the dollar to weaken against other currencies.

In other words, people who do business in other currencies can buy more dollars with their money. And since gold is sold worldwide in dollars, those folks can buy more gold with each Euro, yuan, pound, or peso. And when gold gets cheaper and other currencies, guess what? People buy more of it. So falling interest rates in the US causes the dollar to weaken, setting off a stampede of buyers abroad. And some 90% of the world trade in a currency other than the dollar.

Here's an example. China is the biggest retail market in the world. Demand hit a record high in China last year as geopolitical tensions in Europe, the Middle East and with the U.S. combined with a struggling Chinese economy to drive Chinese buyers to the safety of gold. How much of the metal did the Chinese buy last year? 883 tons of it, according to the World Gold Council. That's equal to 20% of all the gold held in Fort Knox. That's in one country in one year. As the Chinese economy continues to weaken and as tensions grow with the US and our Asian allies, and as the value of the dollar falls against the Chinese one, we can expect demand for gold to soar. And not just in China, but in India, too, as the dollar weakens against the rupee. Together, these two countries account for more than 65% of the total global demand for gold. So these markets matter.

What else is driving the gold rally? Central banks. You probably heard me talk about the value of gold in diversifying your portfolio. Diversification is crucial to protecting your assets against the unforeseen and the unforeseeable. Guess what? Central bankers appreciate the role of diversification, too. They set a record by acquiring 1100 tons of it in 2022, then almost matched that record last year. This comes to half of all the gold in Fort Knox in only two years, and they're on a similar pace in 2024.

So why are central bankers buying gold hand over fist? A recent survey by the World Gold Council found that portfolio diversification was among the top four reasons central bank's whole goal, just behind Gold's performance in times of crisis and its role as a hedge against inflation. In other words, central bankers, some of the most prudent financial players in the world buy and hold gold for the very same reasons we at U.S. Money Reserve urge you to own gold. I'm convinced this gold rally is just getting started. I hope you'll call one of our dedicated account executives to learn more about the many benefits of owning physical gold today.


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