What is behind the soaring gold price?
In April 2024, the price of gold reached a new all-time high of just under USD 2,400 per troy ounce. The rapid price increase within a few weeks caused quite a stir and raised numerous questions. What are the causes? How important is gold in asset allocation? Our detailed analysis provides the answers.
Gold price development
In recent years, the upward trend in the price of gold has bounced off just above the USD 2,000 per troy ounce mark several times. The situation is different in 2024, where the gold price has currently reached a new record level with a double-digit increase since the beginning of the year.
Source: LSEG Datastream, Colin&Cie
Long-term categorisation of gold
Over the past 30 years, gold has achieved an average annual return of just over 6%. In a comparison of returns with other asset classes, the precious metal lies between European bonds with good to very good credit ratings (3.5%) and European equities (8%). In terms of long-term risk, gold ranks just below the level of European equities (+/- 17%) with a fluctuation margin of +/- 15%, while the volatility of European bonds is significantly lower at +/- 4%.
With almost comparable risk to equities, it can make sense to invest in gold despite lower returns. This is due to the correlation between gold and equities. The price of gold generally rises whenever there is uncertainty on the stock markets. A portfolio with equities (return) can therefore be diversified in terms of risk not only with bonds (predictability/security), but also with alternative investments and gold (diversification) and thus stabilised in the event of market turbulence.
Assessment of the situation
When assessing individual financial markets and asset classes, we draw on various relevant valuation factors. Regarding the development of the gold price, these are
a) Sovereign debt: An increase in sovereign debt increases the risk of default. Gold is in greater demand as a hedge, causing the price to rise.
b) Central bank behaviour: With more than 20 percent of global demand for gold, central banks are an important market participant. If demand from central banks increases, the price of gold tends to rise.
c) Negative correlation with equities: The price of gold generally rises when uncertainty and the risk of corrections in equities increase.
d) Real return: The higher the real return (interest minus inflation), the less attractive the alternative investment in gold becomes, as gold pays no interest. Conversely, gold becomes more attractive again when interest rates fall, as the lost interest becomes lower.
e) Trend lines: Looking at the current gold price in the long-term trend channel provides information on the extent to which it deviates from the long-term average. If there is a strong deviation from the trend line, exaggerations (very high, unattractive price) as well as understatements (very low, attractive price) can be recognised.
Outlook
The interpretation of the valuation factors described above enables us to assess the gold price trend for the next six to twelve months:
a) Public debt: The extensive fiscal stimulus programmes to support the economy have led to a massive increase in government debt, particularly in the USA. As the US fiscal programmes will remain high in the coming years, amounting to 6 to 8% of economic output (gross domestic product) (see chart), government debt will continue to rise. This development should support the gold price.
Source: LSEG Datastream, Colin&Cie
b) Behaviour of central banks: Gold is held by central banks as a national reserve for times of crisis and strengthens their credibility and independence. The current trend shows that central banks in industrialised countries are holding their gold reserves, while central banks in emerging markets - such as China (see chart) - are significantly increasing their gold reserves. Increased demand from central banks should support the gold price.
Source: LSEG Datastream, Colin&Cie
c) Negative correlation with equities: A historically reliable indicator of the gold price trend is the negative correlation between gold and equities. However, this correlation is currently invalid. The recent rise in the price of gold does not coincide with a period of uncertainty on the stock markets. On the contrary, there is a euphoric mood on the stock markets, because of which the share indices in the USA and Europe have reached new record highs. As gold and equities rose at the same time, there is currently a positive correlation (see chart). A renewed strengthening of the historical correlation between gold and equities could increase the risk of a falling gold price.
Source: LSEG Datastream, Colin&Cie
d) Real yield: The real yield is also a historically reliable indicator of the gold price trend. Accordingly, the gold price rose when interest rates on US government bonds slipped into negative territory in 2019/2020. With the rise in long-term interest rates in the US from 2021, the gold price should have stagnated or fallen in this context. Instead, it rose significantly. A renewed strengthening of the historical link between gold and real yields could increase the risk of a falling gold price.
Source: LSEG Datastream, Colin&Cie
e) Trend lines: Despite reaching a new all-time high and a strong year to date, the long-term trend - unlike in the 2011-2012 period - does not currently show any exaggeration in the gold price. It is almost exactly on the long-term trend growth line.
Source: LSEG Datastream, Colin&Cie
CONCLUSIONS: On the one hand, the gold price is supported by rising government debt, higher demand for gold from central banks and the long-term trend. On the other hand, the previously reliable and currently invalidated indicators "correlation" and "real yield" urge caution. The overall picture is therefore not consistent. For this reason, we are currently sticking to our current positioning.
Independent analyses by Colin&Cie
Our "Analysis of the record gold price" is an "Independent research note". Its aim is to provide clients and non-clients with objective and comprehensible information on the current gold price trend and to provide an assessment for the next 6 to 12 months.
We use our own valuation models with over 250 indicators to assess financial markets and asset classes. This purely fact-based approach we deliberately distance ourselves as an independent asset manager from subjective or unverifiable forecasts based on media or other influences.
We publish our analyses and assessments in regular articles and in our quarterly publication "Situation Assessment" on the Colin&Cie website.
Disclaimer - legal notice
This publication was produced by the Investment Office of the Colin&Cie Group. The information and opinions contained in this document are based on sources we believe to be reliable. However, we cannot guarantee the reliability, completeness or correctness of these sources. All information and quoted rates are only up-to-date at the time of this publication and are subject to change at any time without notice. The content is based on numerous assumptions made by the Colin & Cie Group. It should be noted that different assumptions can lead to materially different results. The forecasts and assessments are only current at the time this publication is prepared and can change at any time without prior notice. Past performance of an investment is not a guarantee of future results. Certain investments can experience sudden and substantial losses in value. This information and views do not constitute a solicitation, offer or recommendation to buy or sell investment instruments or to carry out any other transactions. We recommend interested investors to consult their personal advisor before making decisions on the basis of this document so that personal investment goals, financial situation, individual needs and risk profile as well as further information can be duly taken into account as part of a comprehensive consultation. The information contained in this publication is marketing material that is distributed for advertising purposes only.
