Grant’s Interest Rate Observer founder & editor Jim Grant discusses the anticipated Federal Reserve rate cut decision, his outlook for gold and the economy, Fed Governor Waller seen as a possible candidate for chair, and the U.S. debt.
Talk about a golden opportunity.
It’s no secret gold has been a coveted asset for centuries. Now, in a world of economic uncertainty and financial volatility, investors are sticking with the timeless allure of the precious metal as a safe-haven for their wealth. As traditional investment options face increasing risks, this tangible asset, backed by a track record of stability, remains a reliable investment choice for those seeking to safeguard their financial future.
Even with all gold has to offer, it still has the chance to shine brighter. Here are some reasons investors are keeping a close eye on gold investments in today’s economy.
1. Record Prices
In this photo illustration, one and five dollar bills are seen on display. (Photo Illustration by Igor Golovniov/SOPA Images/LightRocket via Getty Images / Getty Images)
The price of gold reached an all-time high on Monday, rallying to $2,630 an ounce. The precious metal is up more than 27% year-to-date, according to UBS Global Wealth Management, with last week’s Federal Reserve rate cut, geopolitical tensions and supply constraints all believed to be bolstering the rally.
“We remain Most Preferred on gold in our global strategy, with a target of USD 2,700/oz by mid-2025. Despite the rally, we think gold’s hedging properties remain attractive. Alongside physical gold, investors may consider exposure through structured strategies, ETFs, or via gold miner equities,” said Solita Marcelli, Chief Investment Officer Americas at UBS.
“Investors, unaccustomed to the volatility of individual commodities may also consider exposure via an actively managed strategy that seeks to deliver alpha over comparable passive indices,” she added.
Just last month, the value of a gold bar weighing 400 troy ounces reached the $1 million mark for the first time ever.
While higher prices might sound like a drawback, it could be an opportune time to capitalize on potential future price growth.
At the backdrop of the gold rally, central banks have fueled the cost increase as they continue to buy in an apparent shift away from U.S. Treasurys.
“It helps to provide a solid foundation for sustained gold prices — and an opportunity for investors to capitalize on future price growth,” a CBS reportsaid.
2. Safe-Haven Asset
Jerome Powell, chairman of the US Federal Reserve, during a news conference following a Federal Open Market Committee (FOMC) meeting in Washington, DC, US, on Wednesday, July 31, 2024. The Federal Reserve’s 50 bps rate cut is believed to be partially (Al Drago/Bloomberg via Getty Images / Getty Images)
Gold has solidified its role as a safe-haven asset in 2024 due to ongoing geopolitical tensions in regions like the Middle East and Eastern Europe, which continue to foster uncertainty and drive demand for a stable store of value.
Central banks have tamped up their gold purchases since the dawn of the Russia-Ukraine war in early 2022, according to Goldman Sachs, further indicating the metal’s role as a hedge amid geopolitical turmoil.
Goldman Sachs also credited gold for providing “significant value” as a “portfolio hedge against developments such as tariffs, Fed subordination risk (i.e., the risk that its independence may be undermined), and debt sustainability fears.”
“[It’s] our strategists’ preferred near-term long (the commodity they most expect to go up in the short term), and it’s also their preferred hedge against geopolitical and financial risks,” the investment banking company wrote in the piece.
Domestically, the Federal Reserve’s recent 50 bps rate cut that dominated headlines last week made the asset more attractive to investors by lowering the opportunity cost of non-yielding assets. This translates to a weaker dollar countered by a heightened interest in gold and other non-yielding assets, including other precious metals.
With additional rate cuts expected before the end of the year, that prospective interest among investors could increase further.
3. Inflation Hedge
U.S. real wages have not kept up with inflation since 2021, according to the second annual Bankrate’s Wage to Inflation Index. (Getty Images/iStock/Photo illustration / Fox News)
Gold is also commonly considered an “inflation hedge,” meaning the commodity’s value rises as fiat currencies – like the U.S. dollar – lose value.
Beyond stability during times of substantial geopolitical tensions, Goldman Sachs identified gold as the “best commodity” to serve as a “potential hedge against inflation,” meaning investing in gold would mean that, while the dollars in your wallet might not pack as much purchasing power as they might during lower inflationary periods, gold in your portfolio will remain a powerful asset.
“Gold is rising because the dollar, the euro, the yen… fiat currencies are losing value,” Peter Schiff, Euro Pacific Capital chief economist, told FOX Business’ Charles Payne earlier this year.
“Inflation is real. It’s here to stay. It’s not going anywhere near the Fed’s 2% target.”
The scarcity principle also applies to gold, meaning it can only be sourced in finite qualities as opposed to endless printing as seen with paper currencies.
4. Safeguarding Portfolios
Long term sustainable and wealth management with risk diversification concept : Box printed with financial instrument / investment products i.e stocks, ETFs, bonds, REITs and coins in a shopping cart. (istock / iStock)
Gold is widely regarded as a valuable diversification tool for investors hoping to avoid the potential pitfalls of other asset classes that behave differently during market selloffs or times of economic instability.
State Street Global Advisors, a financial services company headquartered in Boston, for example, writes that the precious metal has the “ability to protect against tail risks” and serve as a tool in “reducing portfolio drawdowns and volatility.”
Gold’s low correlation with other assets like stocks and bonds means its price moves independently, meaning if one of the other areas is underperforming, gold can stay afloat and behave protectively.
The World Gold Council writes of gold’s role as a complement to equities and “broad-based portfolios,” saying the following:
“Gold has historically provided returns, diversification and liquidity. These characteristics combined mean that gold can materially enhance a portfolio’s risk-adjusted returns.”
It also bears other benefits, including zero credit risk, according to the source.
5. Scarcity
Gold bars are presented at the German Central Bank in Frankfurt am Main, central Germany on August 23, 2017. (Photo by ARNE DEDERT/dpa/AFP via Getty Images / Getty Images)
Gold is also finite, meaning it can’t be printed or endlessly replicated like paper money. It can only be extracted in limited quantities, creating perpetual supply constraints that help retain its value.
Add another hurdle to the mix – rising extraction costs, which increased the average All-In Sustaining Cost (AISC) by “10% year-over-year, reaching $1,439 per ounce in early 2024.”
Foreign exchange corporation Oanda says, as gold deposits become increasingly scarce, mining companies have to dig deeper into their pockets for funding in technology and exploration to keep the supply coming.
“This trend is expected to continue, further underpinning the price of gold. The rising AISC, combined with a relatively stable demand outlook, suggests that the gold market will remain in a supply-constrained environment, supporting higher prices,” the company wrote.
At the same time, increased demand for the precious metal for its plethora of uses – jewelry, decoration and even an expanded interest for use in electronics and medical devices – feeds into that high demand despite scarce quantity.
“Right now, we have a supply and demand imbalance,” Sound Planning Group CEO David Stryzewski said while appearing on the FOX Business Network in June.
“These banks are buying up gold and silver at record levels today,” he continued, adding that a global slowdown in production of precious metals is expected, leading to further scarcity.
