Key factors behind the gold price surge and how to invest

Gold, often seen as a safe haven, has recently hit a record high of USD 2,670 per ounce. This precious metal has surged 29% this year, outperforming the S&P 500 index, which has risen by 20%. Goldman Sachs has upheld its price target of $2,700 for gold, forecasting that it will be reached by early 2025.

Several factors have contributed to the increase in gold prices, including interest rate cuts by the Fed, geopolitical instability, rising demand from central banks, and a boost in net long positions in gold. With this optimism surrounding gold prices, how can you invest in gold?

Source: Bloomberg

The Fed unexpectedly cut interest rates by 50 basis points on September 18. According to CME FedWatch, market expectations indicate another 50-basis point cut may occur at the November FOMC meeting. This easing of monetary policy suggests a positive outlook for the price of gold.

When central banks lower interest rates, the returns on interest-bearing assets such as bonds and savings accounts decline. As a result, gold, which does not yield interest, becomes a more appealing investment. Typically, rate cuts often raise inflation concerns. Gold is traditionally viewed as a hedge against inflation, leading investors to increase their purchases.

Global central banks added 1,037 tonnes of gold in 2023, marking the second highest annual purchase in history, according to a World Gold Council (WGC) survey. Notably, 29% of central banks plan to increase their gold reserves in the next twelve months—the highest level since the WGC began its survey in 2018. Nearly 70% of central banks expect their gold reserves to increase over the next five years, up from 62% last year.

The drive to increase gold reserves stems from a desire to rebalance strategic holdings, enhance domestic gold production, and address financial market concerns, including rising crisis risks and inflation. With central banks' demand on the rise, the market anticipates that gold prices will be supported.

The Commodity Futures Trading Commission (CFTC) releases a weekly Commitment of Traders (COT) report that details the positioning of speculative investors in U.S. futures markets. This report serves as a gauge of market sentiment regarding gold prices. As of September 27, there are 310,000 long positions in gold futures, reaching a four-year high, signaling that speculative investors are optimistic about future gold prices

Source: CFTC

The U.S. elections in November will be a crucial focus. Although research from the WGC shows that elections have historically had little significant or immediate effect on gold's performance, fiscal policy concerns create uncertainty in the markets, fueling the trajectory of gold prices.

However, both former President Trump and President Biden have significantly increased federal deficits during their presidencies, pushing U.S. debt above 120% of GDP. Regardless of whether the Republican or Democratic party takes control of the White House, both parties seem unwilling to commit to fiscal restraint, which heightens inflation risks—good news for gold. Trump aims to cut taxes without any viable plan to reduce spending, while Vice-President Kamala Harris proposes new tax policies and seeks to extend Biden's substantial fiscal programs. Regardless of whether Harris or Trump takes office, an economic downturn will likely lead to further deficit expansion. If political gridlock occurs with a divided Congress, it might compel the Federal Reserve to adopt even more accommodative policies.

Physical gold:Purchasing physical gold in the form of jewelry, coins, or bars offers direct exposure to precious metals.

Gold ETFs/ETCs:Exchange-traded funds (ETFs) and Exchange-traded commodities (ETCs) provide a convenient way to invest in gold without holding physical metal. These products closely track gold prices and can be easily traded on exchanges.

Gold mining stocks/ETFs:Investing in gold mining companies or ETFs that include a variety of mining stocks offers exposure to gold prices. However, these investments come with operational risks and can be more volatile than gold itself. In recent years, inflation and interest rate hikes aimed at curbing it have left some gold miners struggling relative to gold prices, as they face rising costs for financing, labor, and materials.

While gold prices are likely to continue receiving support from rate cut expectations, central bank demand, and fiscal policy uncertainty in the short term, investors consider gold investments by assessing different factors to make informed and rational decisions.