Why is the price of gold so high?

Find out why the price of gold is so high and whether it is a good investment now.

If you are thinking of investing in gold, find out the pros and cons and how you can do it in a simple way.

Why is gold so valuable?

Gold has a number of characteristics that make it such a valuable asset. Unlike other financial assets, gold cannot be manufactured. It is a scarce and finite metal that needs to be mined. This makes it less susceptible to speculative cycles. Furthermore, gold is neither depleted nor consumed, unlike other commodities such as oil or wheat. Yet it serves many purposes: gold is made into jewellery, integrated circuits and even components for electric cars, as well as being used in art and jewelry or stored in gold bars. 

Irrespective of what it is used for, its neutral chemical composition means that it cannot react in the presence of other elements. This means that, literally and figuratively, in terms of investments, it does not wear out or lose its lustre. The amount of gold available on the market is fairly stable over time, unaffected by supply and demand. This is why, as well as being an excellent option for investors, gold is an important part of the reserves of various central banks around the world. But why is the price of gold so high?

What are the drivers of the price of gold? 

The price of gold is influenced by a number of factors, the most important of which is the dollar. In fact, these two assets tend to be inversely correlated. A fall in the price of gold tends to be offset by a rise in the exchange rate. 

In addition to the dollar, interest rates also affect the value of gold, as more aggressive fiscal policy increases the attractiveness of debt instruments. In other words, low interest rates increase the appetite for gold, because gold has no associated income, only capital gains. Therefore, whether you hold gold or fiat currency is almost irrelevant when interest rates are close to zero.  

Economic conditions also play an important role in determining how gold performs. Periods of recession and high inflation tend to favour this asset, as it is seen as a good way to diversify investment portfolios and as a form of protection against the volatility of other assets. 

Furthermore, any tension in global geopolitics, such as military conflicts, tends to trigger a bullish reaction in gold. This asset becomes a haven for investors as it offers a degree of stability in times of greater uncertainty. 

How has the price of gold performed recently?

Looking at the longer term, we can see that gold has performed remarkably well. Since the beginning of the century, this asset has only fallen in five years, having risen sharply compared to the general panorama. It even reached an all-time high at the end of 2012, in the midst of the financial crises of 2008 and 2011. It rose again in the early days of the pandemic, after some ups and downs.  

Source: Reuters

As early as 2022, just after the start of the war in Ukraine, gold recorded a new high, dictated by the uncertainty of the war. This was quickly followed by a sharp decline, reaching its lowest price in 15 months. This reversal may seem surprising, but it also suggests that despite its ascribed stability, it is in fact not entirely immune to economic, sector-specific and market volatility. In this specific case, when the price of gold fell after the all-time high at the beginning of March, it was mainly the Fed’s hawkish policy and the appreciation of the dollar that punished the price of gold. However, gold has rebounded and conditions may be ripe for the asset to shine again. Future prospects for a slowdown in inflation and the consequent reversal of current interest rates could support gold prices. 

What are the pros and cons of investing in gold?

As gold tends to move in the opposite direction to equities, it is generally regarded as a safe haven asset. Gold tends to be more protected against inflation and rising and falling stock markets. In times of political and social volatility, investors who own gold protect their wealth. Investing in gold can also be a way of diversifying your investment portfolio, as it retains its value even when other assets are in decline. 

On the other hand, investing in gold does involve some risk. In the form of bullion, it is an asset that is particularly sought after by those who want to preserve their wealth – and for whom capital appreciation is a secondary objective. Other forms of exposure, such as buying shares in gold mining companies, are subject to much of the market volatility that buying gold seeks to avoid. Finally, when markets become unstable, the fact that gold is perceived to be a safe haven asset can lead to hasty, fear-driven decisions.

How to gain exposure to gold 

You can gain exposure to gold by buying physical gold bars directly to preserve its value. However, there is also a greater risk of theft (although in the case of Banco Carregosa you can choose to leave the gold bars with the Bank), lower liquidity or possible depreciation.

Buying shares in mining or other commodity-related companies is another way to invest in gold. This will also give you exposure to specific aspects of the companies and you may also be able to earn dividends over the life of the investment, if the companies have a policy of paying out dividends to shareholders.  

A third option is to invest in gold-based exchange-traded funds (ETFs), which can be bought and sold like shares. This can be particularly beneficial for small investors, as the minimum investment is only the price of a single ETF. In general, the costs involved in this type of funds are lower than those associated with other forms of investment. 

There are a number of alternatives to gold, however. While it is the most popular metal, silver, iridium and palladium are other valuable materials widely used in industrial processes. Incidentally, part of the attractiveness of iridium is due to the increasing use of platinum in the new hydrogen technologies used in more sustainable vehicles. 

To conclude, after careful consideration of the pros and cons, investing in gold may be an option for certain investors. If you are looking to diversify your investment with assets that protect you in times of uncertainty, then gold may be the right choice for you. 

Before taking this step, take the time to evaluate your options. To determine whether gold fits into your overall investment strategy, talk to a professional. You can rely on Banco Carregosa’s team of experts to guide you according to your specific profile in order to make the most of this asset and safely protect and increase your wealth.