Major stock indices remain near all-time highs this week as the government shutdown continues.  Also, gold crossed $4,000 per ounce for the first time this week, an increase of over 50% from its price at the beginning of the year.  Gold can be a tricky investment for the long-term though.  There have been long periods in history where the price of gold did not appreciate, such as 2011 – 2023 pictured below.

https://finance.yahoo.com/quote/GC=F/

 

Gold does not pay interest or dividends, and its price is not tied to profits like stocks.  Like any other asset, its price fluctuates based upon supply and demand factors, but the drivers behind demand for gold are different than the factors driving demand for many other investments.  Typically, investors have turned to gold during periods of economic uncertainty and high inflation, viewing it as both a safe haven when markets turn volatile and a hedge against rising prices.

However, the markets have not been very volatile this year and the inflation rate remains below 3%.  This year demand for gold has risen for a couple of other reasons.  First is de-dollarization. Globally, there has been an accelerated effort by many countries to reduce their ties to the US dollar since 2022.

“The gold rally started in 2022,” Giovanni Staunovo, commodity analyst at UBS Global Wealth Management, said via email on Tuesday. The “trigger point” for the increase was when the U.S. and other Western allies moved to freeze around $300 billion of Russian foreign holdings at the beginning of the war in Ukraine, he added.

Central banks in other nations are “the quiet force behind this climb,” deVere’s Green said. “They are buying close to one thousand [tons] of gold each year to reduce exposure to the dollar and to reinforce their financial resilience.

The US has fewer options to sanction a country when they become less dependent on our currency.

Another major driver behind the increased demand for gold is devaluation of the US dollar.  The value of the US dollar against other currencies dropped about 11% in the first half of this year, the biggest decline in more than 50 years.  According to Google’s AI –

A weak U.S. dollar is a consequence of factors like a widening fiscal deficit, expectations of the Federal Reserve cutting interest rates, and concerns about U.S. economic and political stability.

Further depreciation of the US dollar could have significant impacts for consumers, businesses, investors and ultimately for the overall economy:  It would be more expensive for Americans to travel abroad, US assets could be less compelling for foreign investors, and import prices could rise, putting pressure on inflation.  On the positive side, however, the weaker dollar could be a boost for American exporters.

 

Have a great weekend.

 

Jack C. Harmon II, CFP^®, CIMA

Principal, Harmon Financial Advisors

Registered Principal, Raymond James Financial Services

 

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