Why the Record Hunt for Gold Might Soon Come to an End

The gold price has seen a significant rise in recent months. Two main factors have supported this: Firstly, investors have bought gold for safety reasons. Political uncertainty, particularly regarding the upcoming presidential election in the USA, and geopolitical tensions were responsible for this. Secondly, central banks worldwide have increased their gold reserves by 2% since mid-2022. Can this trend continue?

Gold Price is Subject to Numerous Influences

The development of the gold price is generally influenced by many different factors. An important factor is real interest rates, i.e., the yield after deducting inflation. Generally, rising real interest rates have a negative impact on the gold price, as less risky investment forms like government bonds become more attractive. The real interest rate is currently moderate, keeping the opportunity costs for holding gold low. It is unusual for the gold price to have a positive relationship with the US dollar and the real yields of five- and ten-year US government bonds. Typically, a strong US dollar (in which gold is traded) negatively affects demand, while a weaker US dollar would mean lower prices for buyers in other currencies. Although the trend for the gold price is positive, we remain cautious. Further rising real interest rates (due to falling inflation) could lead to profit-taking. Additionally, there is no shortage of physical gold, and the extent of central bank purchases does not justify the current gold price in our view.

“Digital Gold” - Bitcoin & Co.

In our investment strategy, the precious metal plays a certain role as a portfolio addition, depending on the investor’s risk profile. What about “digital gold,” Bitcoin & Co.? There are theories comparing crypto assets like Bitcoin, which have a limited supply, to gold. Whether this supposed correlation holds up in times of crisis remains to be seen. However, crypto assets have recently posted record numbers. On the one hand, these are driven by the approval of ETFs based on the price of the crypto asset (in addition to Bitcoin ETFs, there are now also Ethereum ETFs), on the other hand, Bitcoin & Co. seem to follow the performance of NASDAQ, the US technology exchange. Therefore, the suitability of crypto assets for diversification is questionable, and the volatility argues against their use in the portfolio of a security-oriented investor.

This information represents the market opinion and investment strategy of Kathrein Privatbank Aktiengesellschaft and aims to provide a general overview of current market data; it is not a direct or indirect recommendation for a specific investment strategy in terms of financial analysis. When investing in gold, securities, or crypto assets, price fluctuations due to market changes are always possible. Past performance is not a reliable indicator of future results.