Gold shines bright

Good morning and today we look at an asset class often ignored by many…GOLD

Now, many in the crypto space dislike gold the same way some traditional finance groups dislike the yellow metal, but lately, gold has been making headlines, and today we take a quick look into what's what! 

In 2024 alone, gold has moved up more than 26% compared to a handsome 19% in the S&P 500. Since September 2022, gold has returned more than 58%. Now, that isn’t a lot in the crypto space or even equities, but for an asset class that acts as a hedge, it’s not bad for sure! Gold, as a commodity, derives its price based on supply and demand, similar to other commodities, but it is not limited only to the supply-demand factor. Gold pricing is also affected by external factors like inflation, geopolitical events, the strength of the dollar compared to other currencies, and more. It turns out that over the last two years, the conditions have been favoring gold’s upward movement

Now, what’s driving gold to move up is what I’ll discuss ahead.

1. High Central Bank Buying
   Central banks worldwide have been accumulating gold in record numbers since 2022. A lot of the demand is from East and Central Asia, with China, India, and Turkey leading the race.

2. The China Factor
   A dull stock market, along with a rampant decline in real estate, has presented China with its own set of challenges, driving interest rates to record lows in the country. All these factors have played into the hands of Chinese retail investors, who kept buying gold throughout the spring and only went quiet once the Shanghai Exchange increased the margin requirements for futures contracts. China alone consumes over two-thirds of annual gold production and has recently been a significant price setter in the market. With a sideways market for 2-3 months, gold has started its next leg up. It will be interesting to see what happens when Chinese demand picks up again.

3. Weak US Dollar
   The U.S. Dollar Index has been falling since Q4 of 2022, which in simple terms means that the U.S. dollar is getting weaker relative to a basket of currencies. With a weakening dollar, investors look for more investing opportunities outside the U.S. markets, and some could seep into gold as well. In fact, the latest increase in gold prices is more a function of dollar weakness than gold strength.

4. Falling Interest Rates
   Gold is a non-yielding asset class and usually does not appeal much to investors and institutions during high interest rate periods. However, now that the U.S. has begun cutting interest rates, some demand could build up in the times ahead. Falling interest rates are also signs of stressed economies and, in turn, create demand for safe-haven assets like gold.

Not bad for a hedge eh?

That’s it for this week!