Movement of metals in volatile times: Part One - Gold

Investors are increasingly looking for safety and capital preservation in the face of this uncertainty, with gold proving one of the major beneficiaries of this deterioration in market sentiment.

The three big reasons why investors are flocking to gold.

1. The global slow down and interest rate cuts

The slowdown in global economic activity is causing investors to bet that central bankers will have to cut interest rates aggressively in the near future. This dynamic is driving money into safe-haven government bonds, which is creating an expanding pool of negative-yielding assets across the world. The gold price has a very strong positive correlation with the size of this pool of assets because although gold yields nothing itself, it doesn’t carry a negative interest rate. Hence, as the amount of negative-yielding bonds grows in financial markets, the relative attractiveness of holding gold increases.

2. Government and central bank buying

Some of the world’s largest central banks and governments have been hoarding gold for years. The biggest culprit here is China, which has tripled its holdings of gold since the GFC and continues to buy vast quantities of the yellow metal. But China isn’t the only government or central bank taking big positions in gold. The Russians have been accumulating gold for years, too, with its holdings seemingly building at an exponential rate. And even the German Bundesbank, another major economic player, is taking a big bite out of global gold supplies, doubling its gold holdings in the years since the GFC.

3. International political and economic risks

Geopolitical conflicts between the US and other nations is driving some governments to reduce their reliance on the US Dollar and the US economy. It pays to remember that that the current global monetary policy system, which puts the USD at the centre of global trade, was not born out of design, but chaos, following the collapse of the Bretton Woods system in the early 1970s. Some countries, especially those hostile to the US, are becoming less invested in the current system – especially as the US “twin-deficits” continue to explode. This is driving buying of gold, as a hedge against the fiat currency system.

What could the future hold for the price of gold?

The all-time high for gold prices occurred during the height of the quantitative easing era in the early 2010s. During that period, central banks, ranging from the US Federal Reserve, European Central Bank, Bank of England, and Bank of Japan all printed extraordinary amounts of money, debasing their currencies in the process, to stimulate their economies. As investors stare down a future of perpetually low or negative interest rates, and greater geopolitical risks, the gold price sits just below a level of resistance not seen since the end of the quantitative easing period. If the current drivers discuss in this article remain, a break of this level, and then further upside, therefore could be on the cards for gold prices.


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