The price of gold surged above US$4,100 (Approx. Shs14 million) an ounce (Approx.28g) on Oct.15 for the first time, taking this year’s extraordinary rally to more than 50%.
The speed of the upswing has been much faster than analysts had predicted and brings the total gains to nearly 100% since the current run started in early 2024.
The soaring price of gold has captured investors’ hearts and wallets and resulted in long lines of people forming outside gold dealers to get their hands on the precious metal.
What explains the soaring price of gold?
A number of reasons have been suggested to explain the current record run for gold. These include greater economic uncertainties from ballooning government debt levels and the current U.S. government shutdown.
There are also growing worries about the independence of the U.S. Federal Reserve. If political interference pushes down U.S. interest rates that could see a resurgence in inflation. Gold is traditionally seen as a hedge against inflation.
But these factors are unlikely to be the main reasons behind the meteoric rise in gold prices.
For starters, the price of gold has been on a sustained upward trajectory for the past few years. That’s well before any of those factors emerged as an issue.
The more likely explanation for the current gold price rally is growing demand from gold exchange-traded funds (ETFs).
These funds track the movements of gold, or other assets such as stocks or bonds, and are traded on the stock exchange. This makes assets such as commodities much more accessible to investors.
Before the first gold ETF was launched in 2003, it was considered too difficult for regular investors to get gold exposure.
Now gold ETFs are widely available, gold can be traded like any other financial asset. This appears to be changing investors’ view of gold’s traditional role as a safe-haven asset in times of political or financial turmoil, when other assets such as stocks are more risky.
In addition to retail investor demand, some emerging market economies – notably China and Russia – are switching their official reserve assets out of currencies such as the U.S. dollar and into gold.
According to the International Monetary Fund, central bank holdings of physical gold in emerging markets have risen 161% since 2006 to be around 10,300 tonnes.
To put this into perspective, emerging market gold holdings grew by only 50% over the 50 years to 2005.
Research suggests the reason for the switch into gold by emerging market economies is the increasing use of financial sanctions by the U.S. and other governments that represent the major reserve currencies (the U.S. dollar, euro, Japanese yen, and British pound).
Indeed, Russia became a net buyer of gold in 2006 and accelerated its gold purchases following its annexation of Crimea in 2014. It now has one of the largest stockpiles in the world.
Meanwhile, China has been selling down its holdings of U.S. government bonds and switching to buying gold in a process referred to as “de-dollarisation”. It wants to reduce its dependency on the U.S. currency.
Emerging market central banks also lifted their gold holdings after Russia’s exclusion from the international payments system known as SWIFT and a proposal by U.S. and European governments to seize Russian central bank reserves to help fund support for Ukraine.
Further de-dollarisation efforts by emerging market economies are expected to continue. Many of these economies now view the major Western currencies as carrying unwanted risk of financial sanctions. This is not the case with gold. This could mean financial sanctions become a less effective policy tool in the future.
Could gold have further to run?
Ongoing demand from Russia and China, and investor demand for gold ETFs, means the gold price could rally further. Both factors represent sustained increases in demand, in addition to existing demand for jewellery and electronics.
Further price rises will likely fuel increased ETF inflows via the “fear of missing out” effect. The World Gold Council last week reported record monthly inflows in September. For the September quarter as a whole, ETF inflows topped US$26 billion and for the nine months to September, fund inflows totalled US$64 billion.
In contrast, emerging market central bank demand for gold is less affected by price and more driven by geopolitical factors, which supports increasing demand for gold.
Based on these two drivers, analysts at Goldman Sachs have already revised up their price target for gold to US$4,900 an ounce by the end of the 2026.
Email:homelandnewspaper@gmail.com
