Source: Golden Ten Data

The price of gold soared to a record high of $2,450 an ounce this Monday — a 25% increase since before the Middle East conflict broke out on October 5. Behind this rise is a fission in the global monetary system, as many countries are trying to reduce their dependence on the US dollar.

However, as this safe-haven asset transaction reached an all-time high, Chris Forgan (Chris Forgan), multi-asset portfolio manager at Fidelity (Fidelity), said, “As an investor, the biggest question worth one million dollars right now is: is this wave of gains still reasonable?”

When evaluating the recent rise in gold, one inexplicable factor is the disconnect between gold prices and US Treasury yields.

“The gap between them has widened,” Fugan said. He has reduced the amount of gold in his portfolio from 6% to 3%.

An important factor contributing to this disconnect is that since the beginning of 2022, central banks have increased their gold holdings in their reserves at an unprecedented rate to make them more resilient to Western sanctions.

According to data from the World Gold Council, central banks carried out the biggest gold buying spree in history in the first three months of this year, buying 290 tons of gold. The West has frozen half of Russia's foreign exchange reserves of about 600 billion US dollars, which is the main catalyst for this buying boom.

Even as expectations of US interest rate cuts have weakened in recent months, the price of gold has continued to soar.

John Reade (John Reade), chief market strategist at the World Gold Council, said this shows that the reason people buy gold “actually has little to do with the US and Western financial markets.”

Instead, he believes that the reason is more related to “de-dollarization,” that is, other countries diversify their reserves and increase their share of gold, and currently no other currency can fill this gap.

The data shows that even in the first quarter, gold ETFs commonly used by Western investors continued to record net outflows, which indicates that the center of gold's rise is in the Far East.

But Nicky Shiels (Nicky Shiels), head of metals strategy at Swiss refiner and trader MKS Pamp, said that as gold prices rise, macroeconomic headwinds — such as a stronger dollar and rising real interest rates — will begin to limit the metal's room for further growth. She believes that these factors were the key factors that led to the retracement of gold gains at the end of April and stagnated at around $2,300 per ounce for two weeks.

However, this also had the opposite effect. Moderate US inflation data last week strengthened traders' expectations that the Federal Reserve will cut interest rates twice this year. This is beneficial to the non-earning asset gold, because the actual yield on bonds will decrease due to falling real yields.

Fidelity's Fugan said, “I'm hesitant to assert that the drivers of gold prices have fundamentally changed.”

Many fund managers are convinced that geopolitical risks and the risk of the fiat currency system will only increase. They mentioned the tense geographical situation between Russia, Ukraine, and the Middle East, the US election, which may herald Trump's return to the White House, stubborn inflation, and the $315 trillion global debt shown by the International Finance Institute.

They said this has created a critical role for gold as a tool to preserve wealth, as it often rises during periods of decline in many other asset classes and global turmoil.

Alex Chartres (Alex Chartres), a fund manager at asset management group Ruffer, believes that when the only possible solution to the US debt crisis is to hold “something the government can't print.”

Steven Jeremy (Steven Jeremy), a renewable energy executive who served in the British Royal Navy for 34 years, also shared this view and distributed most of his wealth on gold. He believes there is still room for an additional 30% increase in the price of gold because he believes the US will have to solve its debt problem through inflation. “If you consider bonds and stocks, although they are profitable, they will be erased by inflation,” he said.

However, there are also those who believe that global risks have been exaggerated. Even if the global economic situation worsens, gold will not play much role in preserving value.

Arnim Pinateau, a recent retiree from the accounting and human resources sector, said he would never invest in gold because he only underperformed for a few years during his 45-year career investing in bonds and stocks. Furthermore, he believes that war in Western Europe within the next five years is “unlikely.” He said, “I will stick to the 'no investment in gold' position and keep it only as the coin my grandfather gave me on my 10th birthday.”

Ruffer's Chartres said, “Gold is a portfolio diversification tool and a hedge against monetary and geopolitical instability. We expect to see more of this in the coming year as we enter an era where inflation is more likely to occur and more volatile.”

edit/lambor