Gold as a Currency
In some economist’s books, gold is always a bubble. It is a primitive metal with few practical uses and no yield as an investment instrument, they argue.
This is an oversimplified view. Gold is a stateless currency. Like other currencies, it has no intrinsic return. But it does have value drivers.
These include real interest rates, the value of the reserve currency and a safe haven store of value. At the moment, gold is running hot but there are good reasons to be cautious.
Gold in the Business Cycle
It is entirely typical of gold to run hard during the early phases of the business cycle.
This is when central banks are cutting interest rates and debasing their currencies.
Recent Market Behavior
However, in recent weeks, there has been a distinct pivot away from aggressive US interest rate cuts and gold has run on anyway:
In tandem with rising yields, the US dollar has also jumped higher in a face-ripping rally, but gold has also ignored that change:
Factors Impacting Gold Prices
With wars in Ukraine and Israel, we could surmise that gold is acting as a safe haven. But the conflicts are contained, and no real threat to the global order. So probably not.
Gold has no fixed value, so it can flex with the perceptions of strength in the underpinnings of the reserve currency but, again, with US growth exceptionalism the driving theme of global markets, gold appears overshot.
Influence of Central Banks
As a reserve asset, gold also enjoys the support of central bank buying.
This has been particularly so in the past decade as various nations that have fallen foul of the US have sought to diversify away from its dollar in their currency holdings.
Investor Behavior and Market Outlook
However, it is not central bank buyers that drive the gold price.
That privilege sits with investors; sometimes hot money flows, and they have been piling into the yellow metal in the last six months.
Gold as a Currency
In some economist’s books, gold is always a bubble. It is a primitive metal with few practical uses and no yield as an investment instrument, they argue.
This is an oversimplified view. Gold is a stateless currency. Like other currencies, it has no intrinsic return. But it does have value drivers.
These include real interest rates, the value of the reserve currency and a safe haven store of value. At the moment, gold is running hot but there are good reasons to be cautious.
Gold in the Business Cycle
It is entirely typical of gold to run hard during the early phases of the business cycle.
This is when central banks are cutting interest rates and debasing their currencies.
Recent Market Behavior
However, in recent weeks, there has been a distinct pivot away from aggressive US interest rate cuts and gold has run on anyway:
In tandem with rising yields, the US dollar has also jumped higher in a face-ripping rally, but gold has also ignored that change:
Factors Impacting Gold Prices
With wars in Ukraine and Israel, we could surmise that gold is acting as a safe haven. But the conflicts are contained, and no real threat to the global order. So probably not.
Gold has no fixed value, so it can flex with the perceptions of strength in the underpinnings of the reserve currency but, again, with US growth exceptionalism the driving theme of global markets, gold appears overshot.
Influence of Central Banks
As a reserve asset, gold also enjoys the support of central bank buying.
This has been particularly so in the past decade as various nations that have fallen foul of the US have sought to diversify away from its dollar in their currency holdings.
Investor Behavior and Market Outlook
However, it is not central bank buyers that drive the gold price.
That privilege sits with investors; sometimes hot money flows, and they have been piling into the yellow metal in the last six months.
