Six rules of gold
The price of gold is currently supported by several mutually reinforcing factors: the increase of U.S. national debt, de-dollarization, supply shortages in mining, inflationary pressure, and the weakening of the dollar. Together, these factors can paint a positive picture for gold in the long term. In the short term, there may be a correction or sideways trend, but structurally, gold remains a strong investment and a safe haven asset. Here’s why!
- The increase of U.S. national debt
One of the most important factors is the dramatic increase in U.S. national debt. The United States is already paying more than $1 trillion a year in interest alone, which is an unsustainable trajectory. This encourages many investors to hold their reserves in gold instead of dollars. Central banks have also moved in this direction: for the first time since 1996, they have more gold in their reserves than the traditional favourite, U.S. Treasury bonds. These institutions can be long-term “strong hands,” meaning they do not sell gold, but continue to buy it.
- De-dollarization and geopolitical realignment
A growing number of countries are trying to become independent of the dollar due to concerns over its long-term strength, potential inflation, and U.S. political/economic uncertainty. The Chinese, for example, want to establish a gold-based clearing house in Hong Kong that could serve as an alternative to the dollar-based system. This “de-dollarization” process will be slow, but in the long term it can strengthen the role of gold as a global store of value.
- Supply constraints in gold mining
Over the past 5-7 years, capital expenditure (CAPEX) in the gold industry has been low compared to previous years, so a decline in production is expected: annual production could fall from 110 million ounces (approx. 3.4 tons) to as low as 70 million (2.2 tons, -37%). This may lead to shortages and further price increases. Although money has begun flowing back into mining projects this spring, the results of these investments will only reach the market years from now.
- Inflation and the weakening of the dollar
U.S. inflation still has not returned to the Federal Reserve’s 2% target, and pressure to cut the benchmark interest rate is increasing. If Donald Trump appoints a new Fed chair (nominees are expected by December), it is likely that a looser monetary policy will be introduced to support economic growth – possibly even another round of quantitative easing (QE) or yield curve control. Since gold is denominated in dollars, a weakening dollar may automatically raise the price of gold.
- Investor behaviour and market movements
The price of gold peaked at around $4,400 per ounce (31.1 grams) this year, then corrected by about 10%. Many are now “nibbling” gold at what is now considered a cheap price of below $4,000, as the fundamentals of the precious metal remain strong. In the short term, the stock market price may even move sideways, as a lot of “hot money” has entered the market. At the same time, major investment banks are setting increasingly higher future target prices, with levels of $5,000-6,000 not being ruled out.
- Political risks and security function
Political uncertainty surrounding Trump and U.S. geopolitical moves – such as the idea of nuclear weapons testing – can be further increasing risk aversion among investors. As a result, gold may increasingly assume the role of safe haven, similar to or even competing with U.S. 10-year Treasury bonds.
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