How gold became one of the world’s hottest investments in 2024

• Gold prices hit an all-time high this week.
• Falling interest rates and increasing geopolitical tensions are increasing gold’s appeal as a safe haven.
• With gold outperforming stocks since October 2022, Wall Street expects the rally to continue.

The price of gold has risen sharply this year.

The precious metal hit a record high of $2,772 an ounce this week and has risen in six of the last seven weeks.

With gains of about 33% since the start of the year, gold returns have outperformed the broader stock market, including the tech-heavy Nasdaq 100, by about 10 percentage points.

And since the bull market in stocks began in October 2022, gold has outperformed equity gains, returning 67%, compared to the S&P 500’s return of around 63%, according to data from YCharts.

These superior returns make the metal one of the hottest investments in the world.

The largest gold ETF, SPDR Gold Shares, has $78 billion in assets under management and has seen about $5 billion in inflows over the past six months, according to data from ETF.com.

Physical gold is also having a moment. Costco has regularly sold out of gold bars as soon as they become available on its website, and Wells Fargo estimates that Costco sells up to $200 million worth of gold bars and silver coins to its members each month.

It’s been a perfect storm for the yellow metal and the outlook points to further gains.

Here’s what’s going on.

Demand from central banks

Global central banks have been on a gold buying spree in recent years.

According to the World Gold Council, central banks purchased a record 483 tons of gold in the first half of the year. Central banks from Turkey, India and China topped the list of biggest buyers.

Part of the surge in demand is coming from countries looking to diversify their holdings away from the US dollar.

“We believe the tripling of central bank purchases since mid-2022 on fears of U.S. financial sanctions and U.S. government debt is structural and will continue,” Goldman Sachs said in a note last month.

This dynamic has been observed since Russia invaded Ukraine in 2022, when America sought to inflict maximum economic damage on Russia through sanctions. But it is harder to impose sanctions on a country that is less dependent on the dollar, and one way to be less dependent on the dollar is to buy gold.

It’s a dynamic the U.S. should watch closely, according to economist Mohamed El-Erian.

El-Erian wrote in an editorial for the FT this week that the continued rise in gold prices “reflects an increasingly persistent behavioral trend among China and ‘middle power’ countries.”

“There is also interest in exploring possible alternatives to the dollar-based payment system that has been at the core of the international architecture for some 80 years.”

Russia has had some success with this, as it was able to keep its economy from going into a complete downturn following the imposition of sweeping sanctions by the US in 2022.

Russia’s ability to lead its de-dollarized economy out of a crisis could give other countries the confidence to reduce their dependence on the dollar, ultimately benefiting gold.

“This is not just about the erosion of the dominant role of the dollar, but also about a gradual change in the way the global system works,” El-Erian said. “As it develops deeper roots, it risks significantly fragmenting the global system and undermining the international influence of the dollar and the U.S. financial system.”

Geopolitical tensions

Gold is considered a safe haven due to its long history as a stable store of value.

So when geopolitical tensions rise, investors tend to turn to the shiny metal, and right now there’s no shortage of reasons to worry.

From Russia’s war against Ukraine to escalating conflicts in the Middle East to China’s long-standing threat to Taiwan’s independence, geopolitical tensions are rising, not waning.

Additionally, rising U.S. debt means that Treasury bonds — another historic safe haven — may no longer be as risk-free.

“Gold appears to be the latest ‘safe haven’ encouraging traders, including central banks, to increase their exposure.” said Bank of America in a note this month.

The Trump trade

Trump trading has picked up steam recently as the former president’s chances of winning the election have increased and gold has been a big beneficiary.

A potential Trump presidency is likely to be accompanied by an exploding federal deficit and a rapidly growing mountain of debt, which would further increase concerns about a recovery in inflation and the sustainability of the US dollar.

“If you’re worried about fiscal waste, financial repression and attacks on Fed independence, gold would be an attractive asset,” economist Davix Oxley of Capital Economics said on Friday.

Even if Trump doesn’t win the election, the deficit is likely to grow, which bodes well for gold to make further gains, according to Steve Sosnick, chief strategist at Interactive Brokers.

“It’s not as if either candidate is preaching fiscal discipline, and the Fed appears poised to continue cutting rates even if inflation remains slightly above target. So there’s a perception that if interest rates rise and the economy remains solid, gold could be a viable alternative. “And if the economy isn’t healthy, it could still be a good store of value,” Sosnick told Business Insider.

Interest rates

According to the World Gold Council, falling interest rates have historically benefited gold prices, with the commodity rising as much as 10% in the six months following the Federal Reserve’s first rate cut.

With the Fed expected to cut interest rates several times over the next year, lower interest rates should act as a tailwind for gold prices.

While interest rates have actually surged since the Fed’s first rate cut last month, and the 10-year Treasury yield hit its highest level since July this week, gold prices have continued to rise.

This is a sign that gold investors are becoming more focused on the global interest rate path, which is pointing downwards as global central banks appear ready to ease monetary policy.

The People’s Bank of China cut rates by 25 basis points this week, while the Bank of Canada cut rates by 50 basis points. The European Central Bank cut interest rates by 25 basis points last week, and economists expect the Bank of England to make deeper rate cuts than markets had previously expected.