At the beginning of March, the gold price embarked on an astonishing rally that has seen it climb almost 20 per cent in a matter of weeks.
It now sits at all-time highs. The silver price has been rallying too, rising more than 14 per cent in the past month. The trigger appears to have been a combination of anticipated falls in real interest rates, plus nervousness on US debt levels, plus buying by Chinese retailers and central banks – but can it last?
The recent rally in the gold price does not necessarily fit a normal pattern. For example, the gold price often moves inversely with real interest rates; gold has no yield and therefore the opportunity cost of holding it is higher when real (inflation-adjusted) yields are higher. But this time gold has moved higher, even though real interest rates have also moved higher.
Gold is often seen as an inflation hedge and yet the price barely moved when inflation was rising in late 2022 and for much of 2023. Yet it has rallied at the point that inflationary pressures have started to ebb. Gold often moves inversely with the dollar, yet the dollar has been rising since the start of the year.
Against this backdrop, it is clear that other elements are at work; fears over the levels of US debt may be a factor. Mounting geopolitical tensions may also have sent some investors in search of safe havens.
Geopolitics is also a factor in central bank buying of gold. European governments have said that they want to use Russian exchange reserves to rebuild Ukraine.
The Russian authorities have reasoned that holding reserves in gold makes it easier to keep out of their hands.
It is not just Russia, but a number of other central banks, including China. These banks are increasingly disinclined to buy US treasuries, given the fractious relationship with the US, and have been moving to gold.
The World Gold Council says central bank buying was at its second highest level on record in 2023. The Financial Times reports that this has mopped up around $155bn (£124bn) of gold between September 2020 and December 2023.
Rising optimism
This is a complicated backdrop from which to start making predictions about the future direction of gold and other precious metals. That said, fund managers appear increasingly optimistic.
Georges Lequime, manager of the WS Amati Strategic Metals fund, has been increasing the fund’s exposure to precious metals and it is now 60 per cent of the fund.
He says: “Precious metal prices are rallying due to strong Chinese retail and central bank buying, coupled with general growing concerns about global debt levels and the increase in geopolitical risk.
"We reduced our holdings in lithium to 16 per cent and increased our exposure to precious metals to 60 per cent during the first quarter of 2024."
