This week, the simultaneous surge in gold and Bitcoin prices has become a hot topic in the market. However, spot gold experienced a significant pullback after reaching a new high of $2,144 per ounce earlier this week. As of the time of writing, spot gold has slightly risen by 0.24% to $2,030, marking a 5% drop from the week's high point, leading to a roller-coaster market situation. This raises questions about the reliability of gold as a "safe-haven" asset.
Jim Reid, Global Head of Economics and Thematic Research at Deutsche Bank, noted that gold does not pay any interest. Despite reaching a nominal new high on Monday, gold is still about 20% below its 1980 peak when adjusted for inflation.
The World Gold Council attributed the sudden rise in gold prices to short-term technical trading. Analysts believe that the surge might have been triggered by algorithmic trading systems automatically executing a series of buy trades after stop-loss points in the derivatives market were hit. Gold has hovered around these historical highs for the past three years without a logical fundamental reason, suggesting that technical operations might be the best explanation.
Reid expressed skepticism about gold's current "safe-haven" status, given its high prices and market reliance on data guidance. With ongoing economic and inflation uncertainties, investors should be wary of potential data-driven market volatility and the risk of dramatic fluctuations in gold prices.
Interestingly, analysts bullish on gold seem to share a similar sentiment with those bullish on Bitcoin, basing their optimism on market sentiment and technical breakthroughs in gold, rather than fundamental factors. Peter Schiff, Chief Global Strategist at Euro Pacific Capital, attributed gold's strong performance to "significant market demand" and a solid support level at $2,000, predicting gold's strength regardless of the Federal Reserve's future actions.
Some analysts argue that even if Bitcoin's operational mechanism is enigmatic to rational economic analysis, it can still be seen as a perfect tool for pure speculation. In contrast, the sudden unexplainable volatility in gold raises concerns that it might be more susceptible to technical manipulation and less responsive to macroeconomic factors.
The general consensus is that market expectations of a Fed rate cut have driven gold prices up. However, the actual divergence between gold prices and real interest rates suggests that while declining rates are 'beneficial' for gold, rising rates should theoretically be detrimental, but this has not been the case:
Since April 2023, alongside real interest rates rising from around 1% to over 2%, gold prices have fluctuated at high levels between $1,800 and $2,000 per ounce, resisting the pressure from rising real rates.
Some believe that central banks' demand for gold is a significant factor in its rise. However, analysts note that physical environment demand and central bank gold purchases have not historically been key determinants of gold trends. In fact, data shows a certain negative correlation between physical gold demand and price trends, indicating that gold prices are more influenced by its financial attributes:
Central banks' gold holdings are primarily strategic, aimed at optimizing official reserve asset structures and enhancing resilience against global financial market volatility. This strategic consideration differs significantly from ordinary investors' perception of buying gold to boost prices.
According to Metal Focus data, global central banks have added 800 tons of gold reserves this year. However, media analyses caution that this figure should be treated carefully, as central banks do not consistently report their gold reserves to the International Monetary Fund, making gold flows opaque.
Contrasting with the continuous central bank gold buying trend, global gold ETFs have seen an outflow of 189 tons since the beginning of the year, with net outflows for six consecutive quarters. This trend is understandable given that gold ETF investors primarily base their gold investment decisions on real interest rates in U.S. Treasury bonds. With continuously rising real rates, ETF outflows are not surprising.
The future trajectory of gold remains a topic of debate. Recent dramatic price fluctuations in gold may concern investors who view it as a "safe-haven" asset, indicating instability and unreliability as a safe harbor:
Relying solely on gold may no longer be considered an appropriate investment strategy. Traditional perceptions of gold might be changing.
Schiff, despite the recent pullback in gold prices, maintains that the $2,000 level is a solid support, predicting a likely continuation of high-level fluctuations and strength in gold prices:
Any drop below $2,000 is expected to attract significant buying interest. "We have cleared the obstacles, and a significant surge is imminent."
With gold breaking above $2,000 even during the Fed's rate hike period, its price trajectory in the current phase of the Fed stopping rate hikes and moving towards cuts can be anticipated. Gold is expected to continue its upward trend regardless of the Fed's future direction.
However, Reid argues that historically, buying gold has been an effective inflation hedge "only at the right time." In the medium to long term, gold's performance has lagged behind traditional risk assets like bonds:
Since 1800, gold's inflation-adjusted annual return rate has been 0.32%, significantly lower compared to the 3.07% return rate for government bonds and 6.83% for stocks.
Analysts also note that rebounds in stock indices like the U.S. stock market have weakened gold's role in hedging portfolio volatility:
Historical performance during the end of Fed rate hikes and the start of rate cuts shows that risk assets like stocks not only perform well during the end of rate hikes but even slightly better than during rate cut phases. Following the conclusion of past Fed rate hike cycles, U.S. stocks have generally strengthened, with an average return rate of 11.7% over 150 trading days.
In conclusion, while gold has traditionally been viewed as a safe-haven asset, recent market dynamics and analyses suggest that this perception may be evolving, with gold's role as a reliable investment and hedge against inflation coming into question.
