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Gold has always been considered a natural anti-inflation hedge. And the current environment has increased its appeal to investors. That is largely due to gold prices reaching historic levels in recent months when they hit an all-time high (ATH) of $2,788.
However, investors are not hurrying to buy physical gold. It still presents certain challenges with regard to handling and securing storage. In response, more investors are turning to gold-backed exchange-traded funds (ETFs) as a safer and more convenient vehicle. Inflows to gold ETFs saw a record $3 billion during the last full week of October. That influx of investment is, in fact, a significant reason for the recent rally in gold prices, though prices have since come down from those ATHs.
But what are the other key drivers of the gold market? Let’s delve into it.
Reasons behind the surge
The Federal Reserve's interest rate policy has a direct impact on different markets, and gold is, of course, not an exclusion. One of the main reasons for gold's recent price rise was the Fed’s decision to cut interest rates by an additional 25 basis points in November.
In a high-interest environment, investors often prefer assets with cash flow. But as interest rates fall, gold becomes more attractive. Although it may not generate cash, it has inherent value and tends to grow in low-rate environments.
As a result of this rate cut, many investors have adjusted their portfolios and moved a portion into gold-backed ETFs as a strategic hedge. In the United States, that list includes the SPDR Gold Shares (GLD), the iShares Gold Trust (IAU), the SPDR Gold MiniShares Trust (GLDM), the abrdn Physical Gold Shares ETF (SGOL) and others.
Geopolitical issues are also pushing demand for gold – during political instability, investors are driven toward stable assets. In recent months, some conflicts around the world have triggered fears they could intensify or spread. This further motivated governments and institutional investors to build up gold reserves.
Take, for example, the current situation in the Middle East, which has stirred concerns about disruptions to energy supply chains. This has increased oil market volatility and created ripple effects across the global economy. As a result, investors, seeing the metal's appeal as a safe and reliable asset, made significant gold purchases.
The U.S. elections also cannot be overlooked. Historically, Republican administrations have been seen as favorable for gold prices, often due to their strong foreign policy positions and pro-growth economic agendas. Donald Trump's victory, with his focus on tighter immigration policies, a firmer stance toward China, and influence over European affairs, could cause more geopolitical tensions. That, in turn, adds to gold’s attractiveness. In the wake of the elections, it may just be a matter of time before gold prices rise even further.
Additionally, there are some economic challenges in Europe. They are mainly connected to Germany’s weakening position within the European Union. Financial slowdowns and instability in the EU, combined with rising doubts about the effectiveness of the European Central Bank (ECB), have led several EU countries to boost their gold reserves.
For example, central banks in Poland have been building up gold reserves as a precaution against vulnerabilities within the EU’s financial system. This case is indicative of a broader trend – a growing unease about the euro and the ECB’s stability.
Conclusion
Gold’s resilience as an investment has only been strengthened by both professional inflows and global economic pressures. As mentioned earlier, declining interest rates are the main drivers behind it. They add to gold’s attractiveness as a stable, reliable investment. So, as central banks maintain supportive monetary policies, gold’s role as a secure store of value will continue to grow.
Investors worldwide are likely to monitor the drivers discussed above closely and adjust their strategies in a gold market. Professional investors, in turn, are expected to keep building up their gold ETF holdings or exploring other financial instruments that offer exposure to gold.
Many expect gold to reach $3,000 per ounce soon, though guessing the exact moment is largely impossible.
Julia Khandoshko is the CEO of the European broker Mind Money.
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Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.