Soaring gold price tells us a lot about unease in the global economy

What is going on with gold? Famously labelled a “barbarous relic” by John Maynard Keynes, the inert and yield-free metal is having a historically great year. It has far outperformed not only its usual peer as a hedge of risk, government bonds, but also global equities.

According to Bloomberg, gold in 2024 has returned 22.2%, compared with a still impressive 15.15% for the MSCI global equity tracker and a miserly 1.83% for the US Treasury seven- to 10-year bond index. What is driving this return? And what does this tell us about where the global economy is going?

The most obvious factor is the weak US dollar. Gold is priced in dollars, so if the dollar is weakening then one would simply expect the dollar price of gold to increase.

The greenback has been selling off in anticipation of the Federal Reserve cutting US interest rates, supposedly starting in September. This expectation was only affirmed last week at the central banker symposium in Jackson Hole, Wyoming, where Fed governor Jerome Powell said that “the time has come for policy to adjust”. The USD is down almost 4% since July, against a basket of currencies, according to Bloomberg. 

But the anticipation of lower interest rates has a secondary effect. Lower bond yields reduce the opportunity cost of holding an asset, like gold, which provides no yield. They make gold look comparatively more compelling versus bonds, which pay a fixed coupon depending on the interest rate. 

Third is the poor state of the Chinese economy. With the growth outlook so grim and having been burnt by collapsing real estate prices and battling equities, Chinese retail investors seem to be choosing bonds and gold as supposedly safe places to store their wealth. Chinese retail gold exchange traded funds have recorded their eighth consecutive month of inflows, lifting total assets under management to RMB53-billion ($7.3-billion) and collective holdings to 94 tonnes of the metal, both the highest in history, according to data from the World Gold Council.

Fourth, data shows that central banks have been increasing their allocation to gold. HSBC research shows that central banks in the past three years have bought about twice as much gold per annum as the average in the past 10 years. In particular the “China block” of countries non-aligned to the US are more aggressively diversifying their holdings of currencies away from the greenback. Gold, here, plays a crucial role for these central banks.

Finally, there is a broader hypothesis which in a sense encapsulates all the above factors. In the same way that Bitcoin was argued to be the ultimate hedge against dollar and fiat currency debasement, coming at the end of a decade of “money printing”, or “Brrrrr” in crypto-parlance, many argue that gold is a special kind of currency. It is a store of value that is not the liability of a feckless government. 

From this perspective, the gold price is not rising but rather all fiat currencies are devaluing against gold due to the inflationary money-printing binges of the post-financial crisis era of monetary policy and QE. Gold here serves as a hedge to preserve wealth while pounds and dollars are debased year in, year out by M2 inflation. 

Cynics would argue that all this is misleading spin; history has shown that the most effective and cheapest hedge against debasement and inflation are equities. Yet the data supporting it is oddly compelling. According to Bloomberg data, the gold price does, in the long run, correlate well with the US M2 growth. 

However, there are substantial periods where it can overshoot either way. For example, the gold price moved sideways throughout the rampant money creation during the covid pandemic. It is only in the last year that it has caught up and M2 has decreased. 

While all these narratives are compelling, there is a more general story that the gold price could be telling us about the global economy. Global markets at present can best be described as schizophrenic, alternating between terror of an upcoming recession and exuberance about another sustained economic expansion thanks to a “soft landing” engineered by this self-congratulating cohort of central bankers. 

In early August, terrified about a looming recession, they crashed. Now, thrilled by the prospect of lower rates, stock markets have just enjoyed their strongest week this year. In truth, there has been very little news of substance this August to trigger the crash at the start of the month or indeed the recovery. Along with the surging gold price, what this demonstrates is deep uncertainty over the global post-pandemic economy and the prospects. Similarly, in the two years preceding the financial crisis in 2008, according to Bloomberg, gold appreciated 116%.

Staring into the last quarter of 2024, and indeed 2025, things look binary. We have clearly come to the end of the chapter of higher interest rates, moderating inflation, resilient jobs markets and constant, if tepid, economic growth. 

There are two clear schools of thought as to what will be next. Either it will be a soft landing of moderate and sustained economic growth, higher but still reasonable unemployment, and low inflation. Or it will be a recession. 

However it is too early to tell which one. As a hedge of both, gold has been a good place to be. DM