What Does The Recent Gold All-Time High Mean?

The price of gold surged to all-time highs in April, surpassing $2,400 an ounce for the first time in history. What factors drove this rally in gold prices, and what does it mean for the gold market going forward?

Key takeaways

• Gold’s all-time highs driven by inflation, central banks, investors, geopolitics
• Gold’s strength underpinned by resilience, trust, fundamental scarcity
• Freezing of Russian assets prompts renewed interest in safe havens
• Expectation of interest rate cuts bodes well for precious metals prices

Before we look at what has pushed gold prices higher this year, it can be helpful to consider the history of gold. History provides some lessons on why gold reacts the way it does to certain factors.

The History of Gold Prices:

For at least three thousand years, gold has been recognised as a form of money in cultures as diverse as Ancient Egypt, the Ottoman empire, Mesopotamia, Persia, Ancient Greece and Ancient Rome, among others. Gold and silver were also highly valued in the early Central and South American cultures, Inca, Aztec and Maya, but were not specifically used as currency in those cultures.

A number of traits have made gold attractive as a store of value and as a metal for jewellery production since ancient times. These include:

• Resilience: Gold is near indestructible. Gold’s ability to resist corrosion means if you buried a gold coin today and dug it up in 100 years, its appearance would be largely unchanged (although this would depend on its purity).
• Brightness: Gold’s natural gleam and deep yellow lustre have made it a symbol of wealth and status for thousands of years.
• Malleability and ductility: Gold’s capacity to be smelted, reshaped, stretched and hammered thin has made it ideal as a material for decorative jewellery since the dawn of civilisation.
• Scarcity: Gold’s natural scarcity in the Earth’s crust has made it a highly valuable and sought-after material.
• High value-to-weight ratio: Gold’s density and scarcity mean that its value per unit of volume is extremely high relative to other metals, making it a more portable store of value than most other metals.
• Utility: In more modern times, gold’s unique properties make it highly valued in a broad range of industrial applications, including electronics, healthcare and medicine, aviation, space exploration and nanotechnology.

In the Later Roman Empire and Byzantine Empire, a gold ‘solidus’ coin is said to have been enough to pay a manual worker’s wages for about a month and a half. While this is no longer quite true in today’s equivalent wealthier countries, it does provide a rough idea of gold’s value even 1,500 to 2,000 years ago.

Fast forward to modern times, and price charts show that gold traded at around $35 an ounce in 1970. Prices surged as high as $700 an ounce in 1980 during a period characterised by high inflation, low economic growth and high unemployment. However, prices eased back after this, and it took until 2007 to reach those highs again. From that point on, gold continued higher, reaching $1,000 an ounce for the first time in 2009 and crossed the $2,000 an ounce mark in 2020.

More recently, gold prices hit an all-time high of over $2,400 an ounce on April 12^th, 2024.

What Factors Have Driven This Upward Trend?

The recent gold price surge to an all-time high in April 2024 does not have a single reason, but rather a number of contributory factors. These include:

Inflation: Inflation rose sharply around the world, particularly during 2021 and 2022. Rising inflation erodes the purchasing power of fiat currencies, as everyday goods cost more, and this can drive investment in gold as a store of value – effectively making it a hedge against rising costs.

Quantitative easing: In response to the 2008 global financial crisis, central banks began to print money to reduce the burden of national debts, effectively increasing the net money supply. Historically, gold has been able to ‘account’ for increased currency supply by rising in nominal terms, so that its purchasing power remains relatively steady amid weakening currency.

Central bank buying: Central banks have been buying gold in earnest in 2023 and 2024, especially China and Poland, as highlighted by the World Gold Council in January. 2023 marked the single largest year of reported Chinese central bank buying of gold since 1977, the report said. Central banks are considered ‘high quality’ buyers as they are relatively price insensitive and are usually in the market to adjust their portfolios along with various assets including domestic and foreign currencies. This means that unlike day-to-day traders, they are not expected to sell volume back into the market any time soon, making their impact on the price more significant.

Chinese investors: Recent years have seen very strong buying of gold by Chinese retail investors, and this reflects China’s strong economic growth and rising middle-class contingent. This trend is drawing physical gold from western markets to the rising economic powers in the east. But more recently, this trend has been driven by concerns over China’s stock market and property market, driving ordinary investors to transfer some of their wealth into gold as a safe haven.

Currency: The US dollar has weakened against other major currencies since late 2022 and this also has had a bullish impact on dollar-denominated gold prices. A weaker dollar makes gold cheaper for buyers in other currencies, driving additional demand.

Geopolitical risk: A further factor driving gold’s recent all-time highs is the heightened geopolitical tensions around the world, notably following Russia’s invasion of Ukraine in February 2022 and the ongoing conflict between the Israeli state and Palestinian militant group Hamas. Both of these flashpoints carry a risk of escalation that could draw in other parties and spiral into wider conflicts. Just like concerns over economic growth, these conflicts tend to drive investment into gold due to its status as a safe haven in troubled times.

Freezing of Russian assets: As a response to Russia’s aggression in Ukraine, western governments froze foreign reserves held by the Russian central bank. This included about $300 billion worth of sovereign Russian assets held in the west. This has raised doubts about the safety of foreign-held assets, helping to persuade central banks to diversify away from currency reserves into other assets like gold.

Can Gold Prices Climb Further?

Gold’s recent price ascent is by no means guaranteed to continue, and all market rallies can be subject to downward reversals if sentiment or fundamentals change. However, there is no reason why gold cannot power up into even higher territory.

One key factor that could propel the yellow metal higher still is a change in monetary policy by central banks. After a few years of aggressive interest rate rises, central banks have more recently signalled that rates could be peaking and they are likely to start cutting rates soon. 

The US Fed is closely watched due to the influence of America’s vast economy, and while the central bank is still fighting to keep inflation under control, the markets are betting on a start of looser monetary policy later this year, with potential rate cuts on the horizon in September.

Lower US interest rates tend to be bullish for gold prices as they weaken the US dollar, but also because they reduce the opportunity cost of holding non-yield-bearing assets like gold. In addition, if the theme of de-dollarisation among central banks continues, this could also contribute to further gains for gold prices.

And in a general sense, a rising global population means more investors are chasing a finite supply of gold, and this, along with rapid growth in emerging markets, augurs well for the long-term future of gold as a store of value, for individuals, companies and governments alike.

For more on the outlook for gold prices, see the Investor’s Guide to Gold in 2024 | Kinesis Money

What Effect Does This Have On Gold Mining Stocks?

The price of gold mining stocks can surge on the back of rising gold prices. This is because the cost of running mining operations is usually relatively constant, meaning any additional rise in the price of gold can translate into an even larger profit margin for gold mining companies in percentage terms, increasing their appeal to investors and lifting the share price.

However, the recent rise to fresh all-time highs for gold seen in 2024 has not necessarily translated into an equivalent boost for gold mining stocks. A number of reasons lie behind this phenomenon, but in general terms, any gains from the higher gold price have been eclipsed by other factors that negatively affected gold miners.

First, the rising inflation that has helped push gold prices higher has also increased miners’ operational costs, squeezing profit margins, as highlighted in this article by Fidelity. Higher interest rates have also increased the cost of borrowing, which acts as a drag on industrial activity in general.

In addition, a growing focus on Environmental, Social and Governance (ESG) may also have made it more difficult for gold mining companies to secure capital investment. More stringent environmental and ethical investment approaches can raise costs for miners who operate in jurisdictions where standards of governance may be lower, creating a headwind for their share price.

That’s not to say gold mining stocks will be unable to match the price performance of physical gold, and certainly a period of lower inflation and lower interest rates could help to reduce operational and borrowing costs, putting wind in mining companies’ sails.

What Does This Mean For Investors?

For gold investors, the recent all-time highs seen in April 2024 have certainly shone a bright spotlight on the yellow metal, highlighting its capacity to rise in value during times of high inflation, and as a contrarian investment that tends to do well when the value of other assets is falling, for example in times of economic uncertainty or increased geopolitical risk.

Gold prices have pulled back slightly from the highs of over $2,400 an ounce, to trade in a range of $2,280 to $2,380 an ounce in the first half of May 2024. Any further delays to interest rate cuts by central banks could create headwinds for gold prices, while an eventual loosening of monetary policy would be expected to support prices further.

Similarly, an easing of geopolitical risks could weigh on gold prices as safe havens lose their appeal, while a further worsening of ongoing conflicts could propel prices to fresh highs.

And against these short-term uncertainties, the long-term backdrop for gold remains supportive, as a growing world population and growth in emerging economies mean a rising number of investors channelling money into a scarce resource. On top of this, if governments continue to print more fiat currency, this will weaken its purchasing power, making hard assets like gold even more attractive as a way to preserve wealth.

Frank’s experience covering the commodities markets spans 22 years, with a particular specialism in metals, carbon and energy markets. He has worked as a senior editor for S&P Global Commodity Insights (formerly Platts) and before this, at ICIS-LOR, a part of Reed Business Information (Reed Elsevier), where he covered the petrochemicals markets from 2003 to 2005.

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