Gold Rally Continues to Impress
Gold's performance in the first nine months of the year in US dollars, Euros and Swiss Francs was impressive, with increases of +28.1%, +27.2%, and +28.3%, respectively. The year-on-year performance as of the end of September was even more impressive, with increases of +42.3%, +35.0%, and +31.1%. These figures lead to the question of whether the gold price has reached its peak or if a significant correction is imminent. However, there are strong arguments to suggest that the gold price is not yet in a region of extreme overvaluation.
Gold's All-Time High Adjusted for Inflation
Gold prices have been hitting all-time highs since December 2023 in US dollars and October 2023 in euros. Despite this, when adjusted for inflation, the month-end gold price is still below its record level of USD 2,646 set in January 1980. This suggests that concerns about the current gold price being overvalued are unfounded.
Furthermore, the rise in the gold price since 2000 has been much more moderate than the second part of the gold bull market in the 1970s. It's also important to note that the method of calculating inflation has changed significantly over more than four decades. If the calculation method used in the 1970s were applied, the inflation rate over the subsequent 40+ years would be significantly higher than currently reported, and so would gold’s inflation-adjusted all-time high.
High Demand for Gold
While China slowed down its pace of gold accumulation in Q2/2024, India accelerated its pace. In Q2/2024, India increased its gold reserves by 18.7 tonnes, only slightly less than Poland did. In Q1/2024, India bought only marginally less. The Bank of India thus increased its gold reserves by 4.6% in just half a year.
Central banks' gold reserves are also an expression of a country’s economic importance. The Polish central bank, NBP, for example, now has a total of 420 tonnes of gold reserves, more than the UK. Adam Glapinski, President of the NBP, emphasized that Poland aims to hold 20% of its currency reserves in gold. The current figure is 14.9 %, while at the end of 2020, it was not even 10%.
Interest Rate Cuts Boost Gold Price
On September 18, the Federal Reserve cut interest rates for the first time since the end of July 2019, by a surprising 0.50 percentage points. This phase of falling interest rates should certainly boost the gold price, as has been the case in each of the three phases of interest rate cuts since the turn of the millennium.
Low Demand from Private and Professional Investors
Demand for gold remains very subdued among private and professional investors, particularly in North America and Europe. A Bank of America survey of investment advisors in 2023 found that 71% had invested no more than 1% of their portfolio in gold. A further 27% held between 1% and 5%.
Geopolitical Tensions Remain High
The war in Ukraine has now been raging for more than 2½ years, and the situation in the Middle East also intensified further at the end of September. The increasingly fragile geopolitical situation is becoming ever more apparent in central banks’ balance sheets. The massive gold purchases by central banks since 2009 and the rising gold price have led to the precious metal’s share of global international reserves increasing to the detriment of fiat currencies.
Bottom Line
While a noticeable correction cannot be ruled out given the enormous price rally over the past 12 months, there are numerous fundamental reasons to believe that gold will continue to rise even after a setback. Given the further deterioration in economic and (geo)political conditions, the model’s price target of just over USD 4,800 by the end of 2030 will be considered a conservative projection. Even gold, which became significantly more expensive last year, is still cheap. What are your thoughts on the continued rise of gold prices? Be sure to share this article with your friends and sign up for the Daily Briefing, which is everyday at 6pm.
