Gold price rally: what factors are driving the price?
The price of gold reached an all-time high of well over USD 2,000 per troy ounce this week. This raises the question for many investors: will the rally continue and does it make sense to add gold to my portfolio?
The price of gold has soared in recent months due to geopolitical risks and the expectation of interest rate cuts. The flare-up of the Middle East conflict and the war in Ukraine are causing uncertainty on the capital markets, and investors are once again using gold as a "safe haven".
Even more important, however, is the expectation that key interest rates will be lowered again in the course of next year. Statements by US Federal Reserve Chairman Powell at the beginning of the week that "monetary policy is quite restrictive" fuelled hopes of interest rate cuts in the first half of 2024. Inflation data has recently fallen significantly on both sides of the Atlantic: In the US, the inflation rate was 3.2% in October and is estimated at 2.4% in the eurozone for the month of Novem ber. This means that inflation is once again very close to the central banks' 2% target. Weaker economic data in particular could lead to interest rate cuts. However, the sometimes sharp wage increases are not yet reflected in the inflation figures, meaning that the inflation rate could rise again as soon as companies pass on labour costs to customers. The ECB is likely to take this into account in its interest rate policy and may not cut interest rates until the end of 2024.
We are currently at an interest rate plateau after the US and European central banks have refrained from further increases since the summer. Historically, the gold price has often risen after US interest rate pauses. Previously, rising real interest rates had a negative impact on the gold price, as they make interest-free gold unattractive compared to bonds.
Will the rally continue?
From a market perspective, the gold price could continue to rise, as both major American investors and many Europeans are underinvested, considering that traditionally an average of ten per cent of financial assets used to be invested in gold rather than less than two per cent as is the case today.
Further upside potential for gold results from purchases by non-G7 central banks. They have observed the freezing of Russian dollar and euro deposits in the US and drawn the appropriate conclusions from this - which has made gold more attractive. In countries with very high inflation, such as Turkey, gold is also in demand as a safe investment.
The gold price could also receive a tailwind from the weakness of other asset classes. Private investors who previously focussed their investments on property, for example, are increasingly turning to other forms of investment. Since the beginning of last year, gold has been a better investment in euro terms than bonds or shares.
Gold as a useful portfolio component
In addition to short-term prospects of price gains, gold remains an important portfolio component as a hedge against geopolitical risks or unexpected problems in the financial system. Or, as the US banker and billionaire John Pierpont Morgan put it: "Gold is money. Everything else is credit."
Gold has been used as a means of payment worldwide for centuries and enjoys relatively stable demand. The precious metal is also used in various industries and in the jewellery industry.
DJE utilises the characteristics of gold as a low-correlation asset class, for example in the DJE - Multi Asset & Trends and DJE Gold & Stabilitätsfonds funds. The DJE - Multi-Asset & Trends has a gold allocation of up to 10%. The defensively orientated mixed fund DJE Gold & Stabilitätsfonds invests approx. 30% of the fund assets in physically deposited gold bars. In both funds, the proportion of gold is actively managed and increased or reduced relative to other asset classes depending on the market situation. The DJE - Gold & Resources focuses on gold mining stocks and mixes in stocks from the broad commodities universe. The concentrated portfolio of 50 - 70 stocks invests in companies that are active in the extraction, processing and marketing of gold.
Note: Marketing advertisement - All information published here is for your information only and does not constitute investment advice or any other recommendation. The statements contained in this document reflect the current assessment of DJE Kapital AG. These may change at any time without prior notice. All statements made have been made with due care in accordance with the state of knowledge at the time of preparation. However, no guarantee and no liability can be assumed for the correctness and completeness.