Why has gold been rising continuously? In 2024, gold created a myth of a 27% surge, and from the beginning of this year until now, the increase in gold prices has already exceeded 64.7%. Recently, I've noticed that many friends have started to get anxious seeing the soaring gold prices. Why has gold been rising continuously?
Is it still a good time to invest in gold assets? Today, we will clarify the logic behind gold in an article. In fact, over the past 50 years, the fluctuations of gold have been relatively easy to predict, mainly related to four major factors: the US dollar, interest rates, inflation and deflation, and geopolitical issues. As long as one can clarify the relationship between gold and these factors, predictions can generally be made in most cases.
The rise and fall of black gold. Let's briefly summarize these four major logics. Since the Bretton Woods system, the US dollar has transformed from a gold satellite into a global currency, while gold has shifted from a monetary anchor to a special asset that combines commodity investment and safe-haven attributes. This essentially means the US dollar has seized the global currency status from gold, which certainly has objections. From then on, gold began to counter the dollar, rising when the dollar falls.
When the yuan weakens, gold strengthens. The logic of how interest rates affect gold is somewhat similar to that of the dollar; when interest rates rise, gold prices fall. For example, the Federal Reserve raised interest rates 11 times in 2022, which caused gold prices to plummet by 23%. The logic is relatively simple: as deposit interest rates rise, the cost of holding gold increases, as gold itself does not generate income.
As long as the price of gold continues to rise, profits can be generated. However, once there’s a decline or no growth, for funds under high interest rates, it’s better to choose to deposit money in the bank. With fewer funds for buying gold, gold prices will naturally be under pressure to drop. As for inflation and deflation, what most people feel deeply should be the situation in 2020 when the pandemic suddenly broke out.
The world has entered an era of massive monetary easing, and gold took off at that time, once surging nearly 10% in a month. Due to gold's scarcity, buying gold to preserve value is almost a consensus among people globally. Although currencies can be over-issued, gold is limited. Don't be misled by the abundance of gold jewelry on the streets; it doesn't reflect gold production.
Even so many, you should know that the total amount of gold mined globally so far is only 210,000 tons, which could fit into a cube with a side length of 22 meters. Therefore, in the face of inflation, the best choice to secure your money is to purchase gold.
Finally, let's discuss the impact of geopolitical issues on gold. There has always been a term that summarizes this very well: in chaotic times, once war breaks out or other unstable factors appear, global investors will choose gold as a safe haven. After all, in chaotic times, all assets are filled with uncertainty.
For thousands of years, even through dynastic changes, gold has remained unaffected, becoming the most valuable asset for hedging. After discussing this, you can see that analyzing the current rise in gold prices with these logics fundamentally doesn't hold water.
You might say war, and the Russo-Ukrainian war is about to end. As for the dollar issue, in the first quarter of this year, the renminbi actually depreciated by 34% against the dollar. Regarding inflation and interest rates, those issues don't really exist; it seems there is no logic supporting the rise of gold. In reality, it's because.
The logic behind gold has actually changed, with the biggest variable being the central banks of various countries. Since 2022, central banks around the world have been buying more than 100 tons of gold each month, and in the first quarter of 2024, they bought an astonishing 290 tons. In the last quarter of last year, the Central Bank of Kazakhstan continuously increased its gold holdings for six months, and now its gold reserves have reached 2200.
292 tons, accounting for 55% of foreign exchange reserves. Russia has even directly converted its dollar reserves into gold, and now the ruble is directly linked to gold.
Why is the world starting to abandon the dollar in favor of gold? The incident originated from the Russo-Ukrainian conflict, after which the US froze $300 billion of Russia's foreign exchange assets as a sanction. This sanction nearly destroyed Russia's financial system and made all countries around the world feel a sense of crisis.
If the dollar can be weaponized, then once it goes against US interests, it could be kicked out of the global trading system at any time. This uncertainty leaves countries with only one option: de-dollarization, and gold is the optimal asset for hedging against dollar risk. When global nations start purchasing, it will naturally lead to rising gold prices, and such surges.
It won't be endless either. There are still significant uncertainties regarding gold in the future. Let's take the simplest example: the recent surge in gold prices is due to the wave of de-dollarization. Is it possible that the dollar will suddenly attack gold upon discovering a crisis, or that a new currency anchor could suddenly appear to replace the dollar?
Everything is possible. Of course, saying this hopes everyone can remain rational. After all, if you take a close look at gold's performance over the years, its volatility is not less than that of stocks, and if the goal is to preserve value, the holding period may need to exceed 10 years to manifest.
Treating gold as a stabilizer in asset allocation rather than a single bet, focusing on signals of a shift in Federal Reserve policy and changes in central bank gold purchasing rhythms. In this way, amidst the wave of reshaping the monetary order, everyone can better grasp gold as a means to hedge against systemic risks.
