How long could the 'gold rush' go on?

Editor's note: Wang Jianhui is the general manager of research and development at Capital Securities. The article reflects the author's opinions and not necessarily the views of CGTN.

Most people believe that they know at least something about gold, the most recognizable universal equivalent of value in human history. Many of them see it as a seemingly safer investment tool and are therefore particularly passionate about purchasing gold bars and coins, placing orders through their bank accounts (the so-called “paper gold”), or trading the gold exchange-traded funds (ETFs). Beginning this year, the market sentiment has been red hot as the spot price touched $3,433.55 per ounce, a historic high since 1978. As of May 25, the one-year return based on LBMA Gold Price was astonishingly 41.8 percent, beating the stock measured by MSCI All Country Worldwide Index (ACWI, 12.2 percent), bond measured by BBG Aggregate Bond Index (6.5 percent), and commodities measured by BBG Commodities Index (2.37 percent). Now the question for the investors is whether to jump onto the wagon.

Before answering the question, we must look at the risks associated with gold investments, which do not include holding or trading shares or corporate bonds of gold mining or jewelry companies. According to the World Gold Council data, the volatility or standard deviation of the LBMA price during the past 12 months was 15.02 percent, only a little lower than that of the stock (ACWI, 15.59 percent) but higher than that of the commodities (BBG Commodities, 13.49 percent). Gold investors, as the data show, may possibly lose money just like others, especially when they are green handed or trade on leverage.

There are several major factors behind the gold price fluctuations. The long-term trend is closely related to the leading interest rate, which indicates the government's monetary policy. Lower interest rates encourage more funding activities and tend to create more liquidity in the market. A bigger money supply thus increased the likelihood of inflation, prompting investors to re-evaluate their assets or switch from other areas into gold. That could largely explain the 18.6 percent growth of the price between January 2020 and 2022, when the Federal Reserve Bank, the European Central Bank and Japanese Central Bank cut the leading rates to 0.25, 0.5 and -0.01 percent, respectively. Between 2022 and 2024, when the inflation really happened in major economies, and the United States, European Union and Japan experienced the highest level since 1997 (9.1, 10.6 and 4.3 percent, respectively), the gold price surged by 42.8 percent in response to the situation, although the geopolitical conflicts also played a role.

Soundness of creditworthiness is another major concern affecting the gold price in the mid to long run. National creditworthiness is mainly determined by healthy fiscal policy, stable economic growth and public security. Heavily accumulated debt burden combined with economic slowdown would trigger severe panic in the market and a strong desire to take refuge in gold, the "safe haven". That was exactly the case in the Eurozone in 2009, when the fiscal deficits accounted for 6.2 percent of GDP and the economy slumped by -4.3 percent. Although the economic growth recovered to 2.1 percent in the next year, the deficit still accounted for 6.3 percent of GDP. Given the global significance of this area, the gold price soared by 60.7 percent. The highest price in the period reached $1777.5, an inflation-adjusted equivalent to $3,077 today (the author's calculation assuming average inflation rate of 4 percent).

Now the world is facing another huge challenge since the European debt crisis. The US government debt has accumulated to $35.1 trillion in 2024 and will reach $37.1 trillion this fiscal year; and the deficit in 2024 accounted for 8 percent of GDP, an elevated level not seen for decades. The economy, after a 4-year consecutive growth, has shown signs of weakening and recorded -0.2 percent decline for the first quarter this year. On top of all these concerns, the new administration has been rolling out aggressive tariff initiatives, which may potentially cause disruptions in global supply chains and a resurgence of inflation. Factoring in the negative expectations, the gold price has risen 24.6 percent so far this year.

Theoretically speaking, there would not be much upside from this level if the current situation doesn't worsen, and the bad expectations wouldn't be fully realized. Although the uncertainties persist, the initial anxiety due to the trade issues has been relieved a little. And any debt crisis in the US seems unlikely so far, since the total net national savings was $237.30 billion in 2024, compared to the -$152.83 billion in 2008, when the global financial crisis began in the US. Since April 22, the gold price at the Commodity Exchange, Inc. has been cooling down from $3,433.55 to $3296.70. It could remain in the range between $3,100 and $3,300 for some time and try to settle down at the $2600 to $2800 level in a year or two. Therefore, investors may want to wait for a while until a better time comes.