Gold Reaches $2,100/oz., Sets Record High
Gold is a highly unique investment. Traditional investments, such as stocks, bonds and currencies, have no intrinsic value. Instead, their value is based by fiat – a declaration of value based on the faith and confidence of the issuer.
For generations of investors, gold has been viewed as a safe haven from global uncertainty and market turbulence. Gold, along with other precious metals, is seen as a constant, tangible asset that will always have worth. Economies, financial systems and even entire countries have collapsed, but for centuries, the yellow metal has proven its ability to store wealth.
Gold is a global commodity, subject to global forces of supply and demand. Historically, the price of gold is driven higher when investors seek safety and shelter from market risk. And over the past few months, those global forces have sent the price of gold soaring higher. On Monday, the price of gold reached an all-time high of $2,136.50/oz. On Nov. 21, gold breached the $2,000/oz. mark for the first time in history. So far this year, gold has risen a hefty 17%. So, what’s behind this spike in gold prices?
Most of the year-to-date surge in the price of gold has come since the Oct. 7 Hamas attack on Israel. Since then, gold prices have surged 15.8%, accounting for the majority of this year’s gain. Though Israel and the Palestinian territory of the Gaza Strip have minimal economies, fear that the conflict spreads and engulfs the broader Middle East has investors worried. The Middle East is home to some of the world’s largest producers of crude oil, specifically, Saudi Arabia.
Domestically, gold prices have been pushed higher by Wall Street’s growing assessment the U.S. Federal Reserve has finally stopped raising interest rates. In its attempt to keep rising inflation in check, the Fed has been aggressively raising interest rates. Since March 2022, the Fed has raised the benchmark fed funds rate from near-0% to its current level between 5.25%-5.5%.
Gold prices are extremely sensitive to changes in interest rates. As interest rates rise, gold tends to decline. Apart from any price appreciation determined in the open market, gold bears no dividend or interest payments. It must compete with interest-bearing investments, such as bonds, for investor funds. As interest rates rise, investors typically shed non-yielding assets such as gold in search of higher yields from other types of investments.
However, with Wall Street not expecting further interest rate hikes by the Fed, there is less of an opportunity cost in buying gold as a safe haven investment. In other words, investors are now more willing to buy gold because the interest payments they could receive on other investments likely won’t go much higher. Gold may even become more attractive to investors if and when the Fed decides to start lowering interest rates.
Finally, concerns still linger on the outlook of the U.S. economy. So far this year, despite high inflation and rising interest rates, consumer spending has remained fairly resilient. Historically, consumer spending drives about 68% of America’s total economic growth. But questions on just how much longer the American consumer remains resilient has many Wall Street economists and analysts projecting a weaker economy in 2024.
With an ever-changing geopolitical climate, a potential end to further interest rate hikes and concerns of a weakening economy, the recent spike in gold prices is certainly understandable. Wall Street has a lot to digest in the upcoming weeks and months as we look to the start of the new year. Where gold prices will go from here is unknown. But for now, investors continue to seek shelter in the comfort of gold.
Mark M. Grywacheski, Investment Advisor
Quad Cities Investment Group is a Registered Investment Adviser.
This material is solely for informational purposes. Advisory services are only offered to clients or prospective clients where Quad Cities Investment Group and its representatives are properly licensed or exempt from licensure. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by Quad Cities Investment Group unless a client service agreement is in place.
