By Tim Courtney, Chief Investment Officer
Gold has recently broken out of its trading range around $2,000 to reach a new all-time high of $2,431.55 in April.1 What drove this sudden surge in price?
Historically, two main drivers affect gold prices: inflation and fear. Longer-term, inflation has proven to be a driver of gold prices. Looking back through history, gold has generated returns very close to the rate of inflation. Over the short-term, fear and investor sentiment tend to drive gold prices. When markets experience increased uncertainty or volatility, gold prices often rise. The last time gold experienced a significant run was in the early 2000s, kicked off by a major stock market downturn.2
In recent months, both of these forces — heightened inflation and growing economic fears — have been at play, pushing gold prices higher. Despite inflation increasing from 2021-2023, gold prices remained steady up until a few months ago, rising sharply in response to a few unexpected bumps in inflation.3
Adding to inflation concerns is the current political climate in the U.S. during an election year. Less than 31% of Americans are satisfied with the presidential election candidates, while the differences in policies and tax proposals have created more doubt about how long current rules will remain in force.4 This election-driven uncertainty is probably playing a role in the rise in gold prices.
While these long and short-term forces impact gold, excess liquidity is a wildcard factor today. U.S. money supply increased by 40% during the pandemic and the following year, as politicians and the Federal Reserve (Fed) created money to avoid an economic depression.5 This excess liquidity has boosted the price of goods, housing, labor, etc. However, it also ended up in assets as well, partially causing rises in stocks and commodities, as well as speculative areas of the market like online gaming, meme stocks and cryptocurrencies.
Gold was slower to attract this liquidity, but it was inevitable that excess cash would eventually find its way into gold, especially as we also started to see wage inflation. We faced a number of extremes in recent years, from zero interest rates to massive government spending, so it's not surprising to see fluctuations in asset prices, including gold.
We have not managed to bring inflation back down to 2% — it seems we are now settling into a range of 3-4%.6 From 2000-2020, inflation was relatively low, around 2%.7 While it was initially thought that the inflation spike in 2022 would be temporary, it has lasted longer than what most economists had predicted and has caused the Fed to keep rates elevated. Gold’s recent move higher may be telling us that inflation will remain above 2% and that regulatory/tax uncertainty is rising as well. If you have questions, please contact your Exencial advisor.
Sources
- World Gold Council (4/26/24) — Gold Reference Prices
- Forbes (12/9/2023) — Gold Has Been an Excellent Barometer in the 2000s
- Investopedia (4/2/24) — Gold Price History: Highs and Lows
- Associated Press (12/14/23) — ‘Unique Horrible Choice:’ Few US Adults Want a Biden-Trump Rematch in 2024, an AP-NORC Poll Shows
- Economies (2/28/22) — Money Supply and Inflation after COVID-19
- NBC News (3/14/24) — Consumer Prices Climbed 3.2% in February as 2% Goal Remains Elusive
- Federal Reserve Bank of Minneapolis (4/26/24) — Consumer Price Index, 1913-
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