Reasons Behind the Gold Surge
This year has seen gold experience a remarkable rise of over 17%, reaching unprecedented levels. Carley Garner, Senior Strategist and Broker at DeCarley Trading, appeared on TheStreet to explain the factors contributing to this recent spike.
CONWAY GITTENS: Could you provide some straightforward reasons to help people grasp what is propelling the rally to record highs?
CARLEY GARNER: Looking at the broader perspective, a couple of years ago, the factors restraining gold were elevated interest rates and a strong dollar. These aspects are beginning to realign. While interest rates remain high, they seem to be trending downward. I believe the Fed may lower rates sooner rather than later, which will likely lead to a similar response in the treasury market. If this occurs, gold will become more appealing. The main reason is that gold does not generate dividends; it serves as a diversifier in a portfolio. It tends to perform well when other assets falter and vice versa, yet it does not yield dividends or interest.
When interest rates are elevated, individuals are encouraged to invest in interest-generating instruments, like treasuries, instead of gold. However, a normalization of interest rates could prompt an increase in investments into gold, offering some support. Additionally, the dollar, currently around 103-104 on the dollar index, is lower than it has been in recent years, but still notably high. We may witness a recalibration of the dollar down to the low 90s. If that happens, all else being equal, gold could also trend higher. We have begun to observe these movements, but they have yet to fully materialize.
Geopolitical Uncertainty’s Influence on Gold
CONWAY GITTENS: To what extent does geopolitics factor into this situation?
CARLEY GARNER: That’s an excellent observation. In times of economic or political uncertainty, many investors flock to safe-haven assets. We’ve witnessed some capital flow into gold and some interest beginning to shift towards silver. This trend will likely intensify if circumstances become tumultuous, especially as we approach election season or if we see repricing in other assets. In my view, the stock market is significantly overvalued, even post-correction, while bonds and gold appear undervalued. Once the reality of certain fundamental issues becomes apparent, we might observe a migration of funds into gold as a hedge against instability.
In Australia, the geopolitical environment can greatly influence gold prices. For example, tensions within the Asia-Pacific region or trade conflicts between major economies such as China and the United States could encourage investors to turn to gold for safety. Given Australia’s robust economic connections with China, any disruption in that relationship could lead to heightened volatility in local markets, driving investors toward gold.
Furthermore, domestic political developments, including federal elections or major policy shifts, can also sway gold prices. Investors often resort to gold during politically unstable times, perceiving it as a reliable store of value amid potential economic turmoil. This phenomenon is not exclusive to Australia but is recognized globally, reinforcing gold’s status as a hedge against unpredictability.
In addition, global occurrences such as conflicts, pandemics, or considerable changes in international relations may ripple through the Australian economy, subsequently affecting gold prices. For example, the surge in gold prices during the COVID-19 pandemic was a result of investors seeking safety amid extraordinary economic challenges. Similarly, any future global crises are likely to trigger a return to safer investments like gold.
While local dynamics certainly influence the situation, the effects of geopolitical uncertainty on gold prices involve a complex interplay of domestic and international factors. Investors in Australia, akin to their global counterparts, will remain vigilant, adjusting their portfolios to navigate risks and seize opportunities arising from the constantly shifting geopolitical landscape.
