Gold has arguably been the best-performing asset in the global financial markets this year.
According to Wind data, on December 24th, the spot price of London gold reached an intraday high of $4,525.83 per ounce. So far this year, the international gold price has surged by over 70%, setting new historical highs more than 50 times cumulatively.
In my view, this bull run in gold is the result of a confluence of multiple variables resonating together.
Firstly, the pressure on the US dollar credit system is the core logic supporting the upward trend in gold prices. In recent years, the rapid expansion of US debt and the increasing doubts about its fiscal sustainability have continuously challenged the credibility of the US dollar, creating a macro-level opportunity for gold allocation. As a time-honored safe-haven asset, gold, with its hedging properties and low correlation with other traditional assets, has become a preferred choice for investors seeking diversified portfolios.
Secondly, the increased gold purchases by global central banks provide solid support for rising prices from the demand side. Motivated by factors such as optimizing foreign exchange reserve structures and achieving asset diversification, central banks' "gold hoarding" has been relentless, becoming even more pronounced in the past two years. The latest data from the World Gold Council shows that in October this year, global official gold reserves saw a net increase of 53 tons, a 36% month-on-month rise from September, continuing the strong trend for the year and marking the largest monthly net purchase since the beginning of the year. By the end of October, the cumulative net purchase of gold by global central banks for the year reached 254 tons.
Thirdly, the Federal Reserve's interest rate cuts have been a key driver of the gold price increase. As a non-yielding asset, gold's investment appeal exhibits a negative correlation with real interest rates. During a Fed rate-cutting cycle, lower interest rates reduce the opportunity cost of holding gold, thereby enhancing its attractiveness.
The recent new highs in the gold price are closely linked to the Fed's rate cuts. The US unemployment rate in November hit a four-year high, reflecting a continued cooling of the labor market and reinforcing market expectations for future Fed rate cuts, providing strong support for the rise in gold prices. The Fed has implemented three consecutive rate cuts this year, totaling 75 basis points. Looking ahead to next year, with inflation rebound risks generally considered controllable and expectations of a continued weakening in the US labor market, there is ample support for the Fed to continue its rate-cutting cycle, which could further propel gold prices upward.
Furthermore, the highly uncertain global geopolitical landscape, combined with unresolved risks of trade friction and the intertwining of various risk factors, has stimulated robust investor demand for safe-haven assets. Consequently, the hedging value of gold has once again garnered significant favor from global investors.
