From a financial market perspective, the year 2023 was primarily the year of the interest rate turnaround. Asset classes that have not produced returns for more than a decade, such as short-term government bonds, are now attracting high nominal interest rates again – and if inflation continues to fall, real interest gains will soon be realistic again.
Actually, such a spike in interest rates is not a good breeding ground for gold, because it never earns any interest. But the price of gold has reached a record high. In early Asian trading, the value of the precious metal rose to $2,135 (1,964 euros) per troy ounce. The gold price exceeded its previous high from 2020.
So what is the reason for the gold rush in the midst of high interest rates? Well, it is speculation that the US Federal Reserve will lower interest rates next year that is driving investors to gold. Some market experts are already seeing falling inflation and dovish statements from the Fed in its past meetings as a sign of the next interest rate turnaround. After the rapid rise, things could soon go downhill again.
Wells Fargo economists are already expecting a rate cut “sooner rather than later,” according to a recent market note. If such analysts are right, this would make gold even more attractive. On the one hand, the interest rate of competing products would then fall. On the other hand, lower key interest rates weaken the US dollar. And that in turn increases international demand for the precious metal traded in US dollars.
Ewa Manthey, raw materials analyst at ING, sees the Middle East conflict as an additional driver for gold’s soaring: “Although the risk of conflict is currently limited to the Middle East, it at least supports the high gold price,” she recently told the Financial Times. Because geopolitical crises make investors doubt a safe and calm future – and gold is seen by many as a safe haven in such times. Gold owners are of course happy about this development. After an exceptionally good year, the price of gold could rise even further in 2024.
But it could also turn out completely differently. A key interest rate falling soon is by no means set in stone, but rather just one possible scenario among many. Analysts at Goldman Sachs, for example, expect the Fed not to cut interest rates before the fourth quarter of next year. As the CME FedWatch Tool – a kind of sentiment barometer for key interest rate expectations – shows, the majority of market participants expect the first interest rate cut in the USA to be in May 2024 at the earliest – by just 25 basis points. That’s why Goldman Sachs expects a gold price of around $2,050 per ounce by the end of next year – that’s no more than the raw material could be worth in the next few days.
Investors should think carefully about whether they want to enter the market or increase their gold positions when prices are so high. The following still applies: Contrary to popular belief, the precious metal is by no means a particularly suitable investment class for risk-averse investors. In the past five years alone, the price has fluctuated between $2,050 and $1,200.
In addition, falling inflation could provide more security for investors. “We are now predicting a significantly softer landing for the global economy than six months ago. This takes away some of gold’s status as a safe haven,” said Joseph Stefans from the financial company MKS PAMP in an interview with the CME Group. In addition, investing in gold only pays off if the price rises. Because otherwise gold brings in nothing. No interest and no dividends either.
Watch the video: Eye test – can you find the gold nugget in the outback sand?
Anyone who is aware of the risks can convert part of their savings into gold. After all, the precious metal often develops in the opposite direction to the capital market, so it can help to balance out fluctuations and thus reduce the overall risk in an investment portfolio. But even if gold fans praise higher gold shares, consumer advocates traditionally recommend five to ten percent gold in the portfolio.
In addition to coins and bars, investors can use ETF-like ETCs or buy stocks in gold mining operators. Well-known listed mining operators include Barrick Gold, Newmont and Agnico Eagle Mines. However, these stocks do not necessarily develop based on the price of gold, but rather based on key business metrics, which also include the cost and capital structure. However, the price of gold can affect the course of the mining operators – this is referred to as gold price leverage.
Note: This article first appeared on Capital.de.
