- The price of gold hit all-time highs this week.
- Falling interest rates and rising geopolitical tensions boost gold's appeal as a safe haven asset.
- With gold outperforming stock prices since October 2022, Wall Street expects the rally to continue.
The price of gold has soared this year.
The precious metal hit a record high of $2,772 per troy ounce this week and has risen in six of the past seven weeks.
With year-to-date gains of about 33%, gold returns have outpaced the broader stock market, including the tech-heavy Nasdaq 100, by about 10 percentage points.
And since the bull market in stocks began in October 2022, gold has outpaced equity gains, returning 67% compared to the S&P 500's return of about 63%, according to data from YCharts.
Those superior returns make the metal one of the world's hottest investments.
The largest gold ETF, the SPDR Gold Shares, has $78 billion in assets under management and has seen about $5 billion of inflows in the past six months, according to data from ETF.com.
Physical gold is also having a moment. Costco has consistently sold out of gold bars when they become available on their website and Wells Fargo estimates that Costco sells up to $200 million in gold bars and silver coins to its members each month.
It's been a perfect storm for the yellow metal, and the outlook suggests more gains ahead.
Here's what's going on.
Demand from central banks
Global central banks have been on a gold-buying spree over the past few years.
According to the World Gold Council, central banks purchased a record 483 tons of gold in the first half of the year. Central banks from Turkey, India, and China topped the list of the biggest buyers.
Part of the surge in demand is from countries that want to diversify their holdings away from the US dollar.
"We believe that the tripling in central bank purchases since mid-2022 on fears about US financial sanctions and US sovereign debt is structural and will continue," Goldman Sachs said in a note last month.
This dynamic has been on display since Russia invaded Ukraine in 2022, as America sought to inflict maximum economic damage on Russia via sanctions. But it's harder to implement sanctions against a country that is less reliant on the dollar, and one way to be less reliant on the dollar is to buy gold.
It is a dynamic that the US should be closely monitoring, according to economist Mohamed El-Erian.
El-Erian wrote in an op-ed for the FT this week that the persistent rise in gold "captures an increasingly persistent behavioural trend among China and 'middle power' countries."
"There is also interest in exploring possible alternatives to the dollar-based payments system that has been at the core of the international architecture for some 80 years."
Russia has had some success with this, as it's managed to navigate its economy away from a full-fledged downturn after the US imposed wide-ranging sanctions in 2022.
Russia's ability to steer its de-dollarized economy away from a crisis could give other countries confidence to lessen their dependence on the dollar, which ultimately benefits gold.
"What is at stake here is not just the erosion of the dollar's dominant role but also a gradual change in the operation of the global system," El-Erian said. "As it develops deeper roots, this risks materially fragmenting the global system and eroding the international influence of the dollar and the US financial system.
Geopolitical tensions
Gold is considered a safe haven asset due to its long-standing history as a stable store of value.
So when geopolitical tensions rise, investors tend to flock to the shiny metal, and right now, there is no shortage of reasons to be worried.
From Russia's war against Ukraine to the escalating clashes in the Middle East to China's long-running threat against Taiwan's independence, geopolitical tensions are rising, not falling.
What's more, soaring US debt means that Treasurys—another historical safe haven asset—might not be so risk-free anymore.
"Gold looks to be the last 'safe haven' asset standing, incentivising traders including central banks to increase exposure," Bank of America said in a note this month.
The Trump trade
The Trump trade has picked up steam recently as the former president's odds of winning the election have risen, and gold has been a big beneficiary.
That's because a potential Trump presidency is expected to be accompanied by a soaring government deficit and a fast-growing pile of debt, which would further drive concerns about a rebound in inflation and the sustainability of the US dollar.
"If you're worried about fiscal profligacy, financial repression, and attacks on Fed independence, gold would be an attractive asset," economist Davix Oxley of Capital Economics said on Friday.
Even if Trump doesn't win the election, the deficit is likely to grow, setting gold up well for more gains, according to Interactive Brokers chief strategist Steve Sosnick.
"It's not as though either candidate is preaching fiscal discipline, and the Fed seems willing to keep cutting even if inflation remains a bit above target. So there is a thought that gold could be a viable alternative if rates rise and the economy remains sound. And if the economy isn't sound it could still be a good store of value," Sosnick told Business Insider."
Interest rates
According to data from the World Gold Council, falling interest rates have historically benefited gold prices, with the commodity rising as much as 10% in the six months after the Federal Reserve's first rate cut.
With the Fed expected to cut interest rates multiple times over the next year, lower rates should serve as a tailwind for gold prices.
While interest rates actually jumped since the Fed's first rate cut last month, with the 10-year Treasury yield hitting its highest level since July this week, gold prices have continued to rise.
That's a sign that gold investors are more focused on the global interest-rate path, which is pointing lower as global central banks look poised to loosen monetary policy.
The People's Bank of China cut rates by 25 basis points this week, while the Bank of Canada cut by 50 basis points. The European Central lowered rates by 25 basis points last week, and economists say they see the Bank of England set to deliver bigger rate cuts than previously expected by markets.