Gold: Why are investors increasingly piling in now?

Gold has seen a substantial increase of approximately 12% year-to-date. However, despite this significant price rise, numerous investors are indicating their intention to continue investing in the precious metal.

We’ve seen a 35% year-to-date rise in clients worldwide looking to increase their exposure to gold within their diversified investment portfolio.

The Timeless Allure

Historical importance and several current and compelling factors that may suggest a steady increase in gold’s price over the long term influence their decision to invest in gold.

These factors are closely interconnected. Consequently they could strengthen the argument for including gold as a key component of a resilient investment strategy.

As I was quoted by Yahoo News, Financial Mirror, and Yorkshire Times, amongst other media,  one of the most compelling reasons they mention investing in gold is the rising demand from advanced economies.

Despite the high prices, widespread reports indicate that central banks in developed countries are increasing their purchases of gold.

These central banks cite the long-term value of gold, its strong performance during crises, and its effectiveness in diversifying portfolios as the main reasons for increasing their purchases.

Diversification and Dominance

Emerging market central banks have traditionally held gold for comparable reasons, particularly since the 2008 financial crisis. Wealthier countries are increasingly adopting this strategy.

Indeed, China’s ongoing spree of buying the precious metal clearly indicates its strategic intent to diversify its reserves.

The country’s strategy of increasing its reserves aims to reduce dependence on the US dollar. Thereby mitigating risks linked to dollar-centric economic policies, sanctions, and geopolitical tensions.  

This move is part of a larger effort to enhance the yuan’s international standing and challenge the dollar’s dominance on the global stage.

Recent data shows that this trend is not limited to China alone. Countries such as Turkey and several nations in the Middle East are also notably increasing their gold reserves.  

Nations Seek Stability Amid Dollar Volatility and Sanctions

Turkey’s central bank, for example, has been one of the top purchasers of gold in recent years, aiming to shield its economy from currency volatility and external financial pressures.

The widespread accumulation of gold underscores a collective shift towards financial security and stability, with a reduced reliance on the US dollar.

Consequently, as more nations adopt similar strategies, the increased demand for gold will raise prices.

We’re seeing a prominent shift in the global commodities market, where some commodities are increasingly priced outside of the dollar.

Indeed, the shift away from dollar-denominated pricing is in response to the US’s frequent use of the dollar as a tool for economic sanctions. While these sanctions serve specific geopolitical objectives, they also erode confidence in the dollar’s stability and reliability as a global currency.

For instance, countries like Russia and China have been actively encouraging using their currencies for transactions involving oil and other commodities.

Why Elections and Economic Policies Drive Gold Investment

Furthermore, geopolitical uncertainty is another significant factor influencing investors’ decisions to invest in gold. The upcoming elections in major economies such as the US, the UK, and France introduce additional tiers of unpredictability to the global economic outlook.

Political uncertainty frequently results in economic volatility, and historically, gold has demonstrated strong performance during such periods.

There were notable market fluctuations during the 2020 US elections, and investors turned to gold as a safe haven amidst the uncertainty. We anticipate similar trends in future elections, where outcomes could profoundly affect economic policies and global trade dynamics.

Therefore, investors hold gold to hedge against these uncertainties and safeguard their overall portfolios from potential downturns.

Moreover, expectations of interest rate cuts by the US Federal Reserve and other global central banks reduce the opportunity cost of holding gold. Lower rates diminish returns on interest-bearing assets, enhancing the attractiveness of gold to investors in this environment.

An increasing number of investors cite several reasons for adding gold to their portfolios. These include growing demand from advanced and emerging economies, China’s strategic diversification, the shift in commodities pricing, geopolitical uncertainties, and expectations of global interest rate cuts by central banks.

Given the current environment, we anticipate a continued upward trend in this timeless precious metal’s prices.

To read my previous blog post, click here.

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