What the price of gold tells us about the economy

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  • The gold price has soared since the start of the year
  • But this isn’t down to the usual drivers

Despite a backdrop of economic turmoil, the gold price held pretty steady between 2020 and 2023. This year has been a different story. As the chart below shows, gold hit a record high of $2,450 in May, and is now up 17 per cent since the start of the year. This is all the more interesting because it’s not immediately clear what’s driving the growth. 

 

The usual suspects 

We can’t pin the movements on interest rates. High rates tend to make gold look relatively unattractive. After all, it generates no yield and incurs storage and insurance costs. This means that rate cuts should be good news for the gold price – only we haven’t seen them yet. Central banks are still holding rates at elevated levels, and markets have rapidly scaled back their expectations for cuts since the start of the year. 

Nor can the high price be attributed to movements in the dollar. All else being equal, a weak dollar tends to be good for the precious metal (which becomes relatively cheaper as the greenback depreciates). Although it has fallen recently, the DXY dollar index is still up nearly 3 per cent since early 2024. 

Nor is there the kind of physical gold shortage that we saw during the pandemic. Georgette Boele, senior economist at ABN Amro, points out that there are no premiums on physical gold this year, with some gold coins trading considerably below spot gold prices. As of April, total gold ETF positions are at similar levels to the start of 2020, while speculative positions in the futures market are stable and at “average levels”. 

Earlier this year, analysts at asset manager Amundi Investment Institute said that recent bullion price spikes “were not easy to connect with specific events or fundamentals”. Instead, broader trends seem to be behind the surge. 

What’s really driving the gold price higher

Jean-Baptiste Berthon, a senior strategist at Amundi, thinks that the high price reflects a scepticism about interest rates being cut to anything approaching the ‘old’ normal. He expects rates to be held at structurally higher levels in future, accompanying shorter economic cycles. This could all create continued uncertainty, making gold look more desirable as a hedge. 

For central banks, gold is also an attractive bet. According to a recent survey of reserve managers, demand for bullion among central banks remains strong this year, reflecting “a response to a volatile macro environment”. The latest survey by the Official Monetary and Financial Institutions Forum think-tank found that the primary motivations for holding gold were diversification (68 per cent) and as a hedge against geopolitical risk (40 per cent). 

If the same forces continue to impact individual investors too, gold could see a further boost from safe haven demand. Amundi’s Berthon thinks that a “structural rise in geopolitical risk and domestic instability” could lead investors to rethink their portfolio diversification – with the precious metal providing part of the solution.

Where the gold price goes next 

The million dollar question is whether these drivers will be strong enough to propel the gold price to even greater highs. 

ABN Amro’s Boele is sceptical, pointing out that there is no shortage in physical gold, while central bank buying “is not justifying gold prices at current levels”. Historically, it is also unusual for the price to rise as the US dollar does: “Even though these changes have occurred in the past, they tend to be temporary in nature, meaning they could last around three to six months,” she added. Boele expects the precious metal to end the year at around $2,000 an ounce. 

Yet Amundi analysts see the gulf between the price of gold and other precious metals (which are primarily driven by industrial demand) as a sign of investor scepticism about a return to the “old normal”. They “do not believe the global economy is close to finding a new balance”, and see a role for gold in a diversified portfolio as a result. Although the sky might not be the limit for the gold price, this uncertain backdrop should be enough to stop it crashing back down to earth.