International gold prices hit an all-time high. Gold broke through the ceiling as it surpassed $4,100 per ounce. Gold bars are in short supply, and prices of exchange-traded funds (ETFs) that track gold are soaring day after day.
As gold prices rise steeply, cash is pouring in, but many investors are unsure whether the rally will continue. That is because gold is showing an unusually sharp rise in an environment unlike the one that used to lift prices in the past. The recent surge in gold prices is the result of multiple factors working together.
Gold has long been considered a traditional safe haven. When stock prices, a risk asset, fall, gold rises, and gold prices have moved in tandem with the value of the U.S. dollar and U.S. bond prices for this reason.
Global investors have used gold's unchanging value as a hedge (risk diversification) against currency depreciation caused by inflation. In inflationary phases, demand for gold concentrates and prices rise.
However, if you think only in terms of the old formulas, it is not easy to understand the current surge in gold. While the dollar remains weak, the U.S. stock market is setting record highs day after day. Inflation concerns are also low. The U.S. Federal Reserve is weighing further rate cuts as it enters an accommodative currency policy cycle.
Yun Yeo-sam of Meritz Securities pointed to two recent drivers of the gold rally. Massive budgets released by governments to stimulate their economies and accommodative currency policies have pumped liquidity into markets, lifting overall asset prices including gold, and as confidence in bonds as a safe haven has wavered, gold is drawing more attention as an alternative.
He said, "Institutions currently buying gold have lost confidence in the surging fiscal deficits and government liability of major countries," and added, "Gold is taking over bonds' role as a safe asset, driving its strength."
Because the drivers of the gold surge are varied, forecasts for its future trajectory inevitably become a complex equation. Yun said, "Gold investors should pay attention to the gold demand of major countries from a political perspective and, at the same time, to 'liquidity + fiscal credibility' from an economic perspective." He said in particular that the sensitivity of ultra-long-term interest rates, which have become a barometer of fiscal credibility, is important.
Another point to remember is that as the rate-cut cycle takes hold, U.S. Treasurys could regain their status. If bonds recover their status as a safe asset and bond preference resumes, funds that have flocked to gold are likely to flow out.
Kang Hyun-gi of DB Financial Investment said, "We should not overlook the possibility that in a rate-cut period, gold could lose out to U.S. Government Bonds in competition among safe assets," adding, "It may not be easy to exit from surging gold right away, but when building a safe-asset allocation, it is advisable to invest a certain portion in U.S. Treasurys along with gold."