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5/8/2024 12:00:00 AM
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Market Watch: Gold Rush - Why investors are buying gold this year

Why gold hit an all-time high this year... and can it keep rising?
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As global investors watch, wait and worry about when interest rates will finally come down, one of the world’s oldest investment options - gold - has surged to an all-time high this year.

The precious metal climbed 10 per cent in the first four months of the year to peak at almost US$2400 ($3990) an ounce by mid-April. It is up almost 50 per cent since 2022.

While it has drifted back in the past couple of weeks, it remains at historically high levels, above US$2300.

“Obviously, gold is seen as a safe haven,” says Pie Funds Chief Investment Officer Mike Taylor.

Rising tension in the Middle East this year had played a part in its surge, he said.

“But it’s not just that. There are central banks around the world looking to diversify out of holding US dollars. And they’re buying gold instead,” Taylor said.

“Gold is seen as an alternative investment and a number of big investors around the world have an allocation to gold. But the main buyers at the moment seem to be the Central Banks because they don’t want to have all their reserves held in US treasuries.”

Compared to other safe-haven investments like bonds, the main difference with gold was that you didn’t get a return from holding it, Taylor said.

“So you only get the capital return over time. It’s supposed to be a protection or hedge against inflation. But you’re not going to get a yield paid the same way you will with money and cash or money and bonds.”

Another driver of the “gold rush” this year has been increased demand from Chinese investors.

The New York Times reports that Chinese consumers have “flocked to gold as their confidence in traditional investments like real estate or stocks has faltered”.

It also points to moves by the Bank of China to steadily increase its gold reserves, cutting its holdings of US debt.


Can it keep rising?

As an investment, gold historically goes up when interest rates go down - and down when rates go up. That’s because its status as an investment with no yield is more appealing when rates are low anyway.

So in some respects, the price may have gotten ahead of itself this year on expectations of US rate cuts. That would explain the recent correction (as markets have pared back rate-cut hopes), but it would also suggest that it may still have some way to go once rates do actually start to fall.

Exactly when that will happen remains uncertain, with market pricing flip-flopping in recent days around comments from the US Federal Reserve chair, Jerome Powell.

“We started the year in the US with about six 0.25 percent rate cuts priced in,” Taylor said.

“Almost all those rate cuts have been removed - there’s a chance of a small one in December, I think we’d almost reached the point where the markets were actually worried that the Fed might start hiking again,” Taylor said.

At the latest Fed meeting last week, Powell had allayed those fears.

Inflation has come down quite a long way, but sometimes, getting that ”last mile” of inflation out of the economy was hard, Taylor said.

“Central Banks, or the Reserve Bank here, have got to be quite careful that they don’t push economies deep into recession by holding rates too high or too high for too long.”

Dwindling rate cut expectations had seen US markets fall back through April, he said.

“Tech stocks were down about 5 percent. And even the Dow Jones [industrial index] was down 5 percent for the month because a lot of those companies are tied to interest rates - whether that be real estate or infrastructure assets.”

Even Bitcoin had a challenging month in April as it seemed to correlate with how the Nasdaq performs, Taylor said.

“On the flipside, gold’s been very strong this year and held on to most of those gains throughout the month.”



The Market Watch video is produced in association with NZ Herald and Pie Funds. Liam Dann is Business Editor at Large for the New Zealand Herald. He is a senior writer and columnist as well as presenting and producing videos and podcasts. He joined the Herald in 2003.

Information is current as at 30 April 2024. Pie Funds Management Limited is the manager and issuer of the funds in the Pie Funds Management Scheme and Pie KiwiSaver Scheme (the Schemes). Any advice is given by Pie Funds Management Limited and is general only. Our advice relates only to the specific financial products mentioned and does not account for personal circumstances or financial goals. Please see a financial adviser for tailored advice. You may have to pay product or other fees, like brokerage, if you act on any advice. As manager of the Schemes’ investment funds, we receive fees determined by your balance and we benefit financially if you invest in our products. We manage this conflict of interest via an internal compliance framework designed to help us meet our duties to you. For information about how we can help you, our duties and complaint process and how disputes can be resolved, or to see our product disclosure statement, please visit www.piefunds.co.nz. Please let us know if you would like a hard copy of this disclosure information. Past performance is not a guarantee of future returns. Returns can be negative as well as positive and returns over different periods may vary.

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