Gold is Gold: Navigating the Surge in Prices

Written with data as of April 3rd, 2024.

Over the past six months, the value of gold has increased by 23%, equating to a rise of $425 per ounce. With this recent rapid ascent in the price of gold, we have decided to create a brief write-up exploring the factors that can influence the price of this asset.

Introduction to Gold

In recent times, the price of gold has seen a significant increase, capturing the attention of investors worldwide. Traditionally considered a store of value and a hedge against economic uncertainty, gold's role in the current financial landscape is more pertinent than ever. This report delves into the historical context of gold as a currency, the factors influencing its price, and the strategic investment approaches adopted by institutions like the Future Fund.

Gold as a Currency

Gold has been a symbol of wealth and a medium of exchange for thousands of years. Its journey from the first standardized gold coins minted by King Croesus of Lydia to the establishment of the gold standard showcases its intrinsic value in the global economy. However, the transition from the gold standard to fiat currency systems in the 20th century marked a significant shift, with major economies like the United States decoupling their currencies from gold.

Factors Influencing Gold Prices

Several macroeconomic factors play a crucial role in determining the price of gold: Inflation: Gold is often seen as a hedge against inflation, as its value tends to rise when the purchasing power of a currency falls.
Interest Rates: There is an inverse relationship between interest rates and gold prices. Lower interest rates make gold more attractive as it does not bear any yield.
Economic Growth: During periods of strong economic growth, gold may be less attractive as investors opt for riskier assets with potentially higher returns.
Geopolitical Tensions: Gold is considered a safe-haven asset, and its price often rises during times of geopolitical instability. Currency Fluctuations: Since gold is priced in U.S. dollars, a weaker dollar can make gold more expensive for buyers using other currencies, leading to increased demand.

Global Trends in Gold Buying

Central banks, particularly those in emerging economies, have been increasing their gold reserves. This trend is part of a broader strategy to diversify away from the U.S. dollar as the world's primary reserve currency. Countries like Russia, India, and China have been leading this gold-buying spree, viewing gold as a hedge against currency risk and economic uncertainty.

Institutional Investment in Gold: The Case of the Future Fund

The Australian sovereign wealth fund, the Future Fund, has recently incorporated gold into its investment portfolio for the first time. This decision was influenced by the anticipation of more populist governments and the potential for currency debasement. The Future Fund's strategy, inspired by the book "The Fourth Turning," reflects a broader shift in institutional investment towards tangible assets like gold, real estate, and infrastructure that can provide stability and value in uncertain times.