Gold Rush Sweeps Global Markets: What’s Behind the Record Run?

18 sept

The shiny stuff has outperformed stocks by a lot this year, sparking a debate over gold’s characteristics as an asset: is it just a pet rock that does nothing but sit idle, or is it the ultimate timeless store of value that trounces every competitor in times of uncertainty and gloomy outlook?

Gold XAUUSD is so back — the precious metal has outperformed nearly every other megacap asset, including the S&P 500 where 500 of America’s biggest and brightest companies generate returns for shareholders like a restless corporate machine.

Since the start of trading this year, gold is up a solid 25% to hit a record high of $2,590 earlier this week. In comparison, the broad-based Wall Street average, the S&P 500 SPX, is up 18% over the same time span.

Thank the impatient people who bet on prospects and can’t wait for the rumor to materialize. To a fairly big extent, the gains in gold are driven by the prospects of lower borrowing costs. Not the single cut to interest rates, which would be in the ballpark of 25 basis points to 50 basis points. That’s fairly fresh — way before that, early in 2024, investors were high on hopium that they’ll get as many as six slashes to interest rates.

Hopes Fade but Gains Stay

Gold didn’t show any signs of fatigue despite the Fed pushing against the consensus views. It plowed through mixed bags of macro reports showing that the US economy was zig-zagging between hot and cold.

Ultimately, gold won back its reputation as a preferred investment in times of shifting monetary policy landscapes, brewing geopolitical tensions, and overall uncertainty and gloomy outlook for global markets.

The fast-paced, hot-to-the-touch gold market today is in stark contrast to historical performance. During the time frame 2011 through 2018, gold was virtually muted and hugging the flatline with nothing exciting about it.

Right now, gold’s everywhere — from the retail trader’s portfolio to the central banks’ vaults. Global central banks, the money-printing machines with infinite reserves, stacked up the bullion to the tune of 483 tons in the first half of the year, says the World Gold Council. It’s a record since record-keeping began.

Good Guy Gold

But wait, that's not all — gold has buoyed some free riders. Gold-backed assets are partying hard, too. Gold mining companies are whizzing through, riding on massive year-to-date gains with the top performers up about 30%.

Exchange-traded funds with exposure to gold are flaunting big gains as well. These gold ETFs barely flash any red on the year with the top players flexing advances by as much as 50%.

The Great Portfolio Rotation or What’s Opportunity Cost?

By the looks of it, there’s this portfolio rotation into gold in the lead-up to the Federal Reserve’s upcoming interest rate cut. The US central bank is getting ready to knock down the cost of borrowing in an effort to alleviate some of the strain on the economy and lean against a possible recession.

What’s gold’s role in all that hubbub? Gold gets more attractive amid lower interest rates thanks to something called “opportunity cost.” In a nutshell, higher rates generally benefit fixed-income assets like bonds that get you guaranteed returns. And why jam your money into gold when you can ride out the high-rate wave and churn out 5% on the 10-year bond US10Y. That’s opportunity cost — missing out on fun, gains and dopamine while your hands are full with a non-yielding asset. What we’ve seen so far is a marked shift away from it.

Bond yields are falling in anticipation of the Fed’s rate cut, prompting investors to ramp up their long positions in the yellow bars, which are notorious for … well … yielding nothing. In other words, holding gold gets you no yield, interest, or dividend whatsoever, unlike bonds or the US dollar deposits where you can sit around and do nothing and still make money.

The prospects of downshifting interest rates have diminished the opportunity cost of non-yielding gold. Apparently, the shiny metal still has it — whenever the right conditions perk up, gold lives up to its standards of being a safe haven and a store of value.

What’s your take on gold? Do you have a long position in it or you’re a permabear who’s brave enough to short it at the top? Comment below!