Gold has rewarded those looking for safety, but its stellar gains may be attracting another sort of investor.Angelika Warmuth/Reuters
When the price of gold rallied above US$4,000 an ounce this week for the first time, it followed a path established by bullish forecasters earlier in the year. But are we facing yet another pricey asset?
Gold has maintained a blistering pace throughout much of this year. It broke through US$3,000 an ounce in March and has gained about US$700 since August alone.
This year’s rally, at 53 per cent since the start of January, may turn out to be the best year for gold in well over four decades.
Many Canadian producers are performing even better, as the surging underlying commodity translates into fatter profit margins.
U.S. dollar anxiety drives precious metals rally as gold trade gets crowded
Agnico Eagle Mines Ltd. AEM-T and Barrick Gold Corp. ABX-T, among the biggest companies in the sector, have doubled, driving the S&P/TSX Composite Index to new heights.
There are several reasons for gold’s popularity among investors.
The economic uncertainty flowing from U.S. President Donald Trump’s erratic tariff policies has turned many safety-seeking investors toward the metal’s haven status.
The U.S. dollar index, which compares the dollar against a basket of global currencies, has retreated about 10 per cent since January, adding a significant tailwind given that gold is priced in U.S. dollars.
The start of a new round of rate cutting by the Federal Reserve last month has reduced the opportunity cost of holding gold. Since the commodity doesn’t pay a dividend, it becomes more attractive as rates fall and yields on dividend stocks and bonds decline.
Add simmering concerns about inflation, Mr. Trump’s efforts to throttle the Fed’s independence and spiralling government debt in the United States and abroad – conditions that can drive investors into alternative assets – and it is not a huge surprise that gold has been breaking records this year.
The case for US$5,000 rests on central banks buying more bullion to diversify their reserves. A terrifying correction in stocks might not hurt either.
But jumping into gold today also comes with risk: While the world looks upside down right now, it might not stay that way.
Gold is notoriously difficult to value, since its industrial uses are limited, leaving some observers reluctant to say how long the current rally can go.
“Gold is like the art market – prices have completely disconnected from marginal production costs, and we are at lofty price levels on most valuation metrics,” Max Layton, a commodities analyst at Citigroup, said in a note late last month.
These lofty levels may be due to surging interest among investors who have tapped gold as the next big thing in a market that has plenty of bubbly-looking assets – from AI to Bitcoin to silver to the S&P 500.
Hamad Hussain, climate and commodities economist at Capital Economics, thinks that the record amount of money flowing into bullion-backed exchange-traded funds suggests that investors, rather than central banks, are now driving the gold market.
This buying impulse could be driven less by an urgent need for a safe haven and more by that nemesis of fundamental valuation – fear of missing out.
“Given that ‘FOMO’ appears to be creeping into the gold market, it has become even harder to objectively value gold,” Mr. Hussain said in a note this week.
While gold prices could grind higher in the next couple of years, he added, the rally will slow as those bullish tailwinds start to weaken.
You could see a hint of this slowdown on Thursday with the arrival of – what’s this? – good news.
After Israel and Hamas signed an agreement to end two years of war, potentially removing a grave geopolitical crisis, gold fell 2.4 per cent and retreated below the US$4,000 an ounce threshold, before rebounding early Friday.
Late arrivals to the gold trade might want to contemplate the arrival of more good news.
Renewed confidence in an independent Fed, subsiding U.S. inflation or newfound strength in the global economy as it adjusts to tariffs might not exactly play into the long-term bullish case for bullion.
Mr. Layton, who likes gold, nonetheless expects that there could be a rotation out of the commodity next year, and into more useful metals like copper and aluminum, as the economic backdrop improves.
Gold has rewarded investors who bet that anxiety would drive demand for a traditionally safe asset. The world remains unsettled – and a future Nobel Peace Prize for President Trump doesn’t look like such a long shot now – which could work in gold’s favour.
But investors can’t ignore the downside: Gold is looking old.