Gold’s 13% Quarter

In the third quarter, gold prices rose 13.24%, putting its year-to-date return at 27.5%.

Gold is most often thought of as a hedge against inflation, so as the inflation rate falls, why did gold continue to rise?

There are a few key reasons:

1. Lower interest rates — When interest rates are lower, gold looks more attractive as a portfolio diversifier because you won’t earn much with lower interest rate bonds. This year interest rates have fallen.
2. Central bank policies — Central banks, often in emerging markets and during times of geopolitical pressure, increase their physical gold reserves. With the world sanctioning Russia in early 2022, Russia and other countries began increasing their gold reserves as a percentage of their total reserves. The ongoing global conflicts are further driving central banks to increase gold reserves. Central banks buy about 50% of all gold mined globally.
3. Currency depreciation — I believe this is one of the largest factors. From its near high in early July, the US Dollar is down 5.25% compared to other major world currencies. However, the Dollar remains historically high because nations and their citizens tend to buy bonds in the safest, highest-yielding countries. Before doing that, they must sell their currency and buy the Dollar. Up until earlier this year, that country was the United States. This relationship is the opposite of what benefits gold, but now that the Fed is cutting interest rates faster than the rest of the world, it’s pushing investors out of the Dollar. In the US gold is priced in dollars, but has value outside of the quoted dollars thus making it worth more.

One of the most fascinating characteristics of gold is that it has value independent of the currency it is quoted in. People, governments, and institutions all believe gold is a store of value, and everyone globally sees it as having the same level of store of value.

For example, the difference between Turkish citizens buying the US Dollar versus buying gold meant they missed out on almost 2,000% of purchasing power over the last ten years.

While gold has had a great year, it is nearly impossible to forecast when the next war will happen or if it will coincide with global interest rate changes.

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