Let’s say you have a 1-ounce bar of gold sitting on your desk. Right next to it is a stack of U.S. dollars equal to the early Aug. 6 spot price of gold, $2,413.90 per ounce.
If you didn’t do anything with either for 50 years, it’s likely that the stack of dollars will be worth much less, while the gold bar will probably be worth about the same, adjusted for inflation.
At least that’s the idea behind much of the gold buying at the moment.
“I think there are multiple reasons for the current bullish environment for gold, and they seem to be related to an underlying theme: perceived weakness for the U.S. dollar,” says Tom Schneider, analyst at NinjaTrader.
It’s also true that all eyes in the gold market have been focused on expectations for at least one U.S. Federal Reserve rate cut this year and four next year. Gold, which doesn’t pay any interest, becomes more attractive as interest rates decline.
“However, in this case, interest rate cuts being priced in most likely has less to do with rates themselves and more to do with how the U.S. dollar will react, at least when it comes to gold,” says John Koch, senior investment analyst at iSectors. “Gold can be a useful store of value if the U.S. dollar weakens.”
If the Fed does, indeed, take such actions, some fear that the resulting lower Treasury yields will make investing in the U.S. less attractive for international firms, which could weaken the greenback.
Others are more pessimistic about the longer-term trajectory of the dollar because of “record debt and deficits as well as the highest debt-to-GDP since World War II, a debt whose interest already exceeds the national defense budget and is destined to be much, much worse in coming years,” says Ed Mahaffy, senior portfolio manager at ClientFirst Wealth Management.
When the dollar declines, it takes more bucks to buy the same ounce of gold, making the precious metal a hedge against the dollar’s decline, or to use another word, “inflation.”
“Gold serves as a hedge against inflation, protecting the purchasing power of those who own it in their local currency,” Mahaffy says. “Many people are currently fearful and seeking such protection, leading to a rapid sale of gold bars at retailers like Costco.”
Gold is also viewed as a safe-haven investment along with U.S. Treasurys. That’s one reason that gold becomes more attractive as interest rates on government debt fall. It also raises questions about whether some of the buying in gold could be because of worries about a recession.
“With the expectation of the Fed cutting rates as soon as September, I think gold will likely get a bump as investors look for an asset that holds value during recessionary times, which some think we are living in right now,” Schneider says.
Alex Ebkarian, chief operating officer with Allegiance Gold, says recessionary risk is one of the reasons gold prices are high. He points to “bubbles” in commercial real estate, markets and the banking sectors, lower consumer savings, higher credit card debt, and early indicators of potentially weaker job and wage growth.
“Gold is foretelling the underlying problems,” Ebkarian says.
Initial jobless claims and the fact that short-term interest rates exceed long-term rates are among the recession indicators that are flashing, says Adam Butler, senior account executive at Anthem Gold.
Not everyone thinks recession worries are baked into gold prices, though.
“Gold has climbed because of optimism about Fed rate cuts,” says David Russell, global head of market strategy with TradeStation Group. “It hasn’t yet been linked to recession fears, but that could become another catalyst because an economic slowdown would likely push rates lower as well.”
The expected Fed rate cuts and recession fears are related, as the central bank uses lower interest rates to help stimulate economic activity when data point to slowing growth.
“The view that the Fed will lower rates is due to weaker economic and employment data,” says Chris Mancini, associate portfolio manager of the Gabelli Gold Fund (ticker: GOLDX). “Gold will outperform if rates decline because of weaker economic data. If the weaker economy causes governments to stimulate, especially for infrastructure, then both gold and industrial metals will rise at the same time.”
Beyond recession worries, interest rate cut expectations and concerns about the potential for dollar weakness, gold prices are also responding to geopolitical tensions surrounding the wars in Ukraine and Israel.
“Gold is a good hedge against consistent inflation and geopolitical uncertainty,” says Davide Accomazzo, finance instructor at Pepperdine Graziadio Business School. “Its recent rise is linked to inflationary pressures, which only recently have begun to ease, and the possibility that current wars and conflicts could expand into a much more dangerous regional conflagration.”
The largest upcoming catalyst for gold prices is the anticipated September rate cut by the Federal Reserve, which would be positive for gold prices.
Another catalyst is the U.S. presidential election in November. Political uncertainty can be a tailwind for gold prices, although Accomazzo says monetary policy will likely remain loose regardless of who wins the White House, which also supports gold prices.
“I believe gold could see some more upside going into the end of the year, and possibly into next year, as the market believes the Fed will begin their rate cut cycle in September,” Schneider says. “This is tempered by the seasonality of gold prices in election years; the gold price tends to consolidate with a Republican victory and rise after a Democratic candidate wins.”
Mancini points out that gold has risen to record highs even as physically backed gold exchange-traded funds have seen consistent outflows, a trend that is reversing.
“ETFs are now starting to buy,” he says. “If ETFs add gold as interest rates decline, then gold should rise meaningfully.”
Given the background support of central bank gold buying and recent declines in the stock market, Koch anticipates gold’s price will continue to rise “if investors who had been sitting in cash want to deploy that capital in an investment that does not have a high correlation with traditional asset classes like stocks and bonds.”
If you’re one of those investors who wants to turn some cash into gold, there are plenty of ways to do it:
Physical Gold
One way is by buying physical gold in the form of bars and coins.
“There are many reputable places online where you can buy with confidence,” says Nick Fulton, managing partner with USA Pawn Stores of Mississippi, pointing to Apmex.com as one of his favorites.
Local pawnshops and coin dealers are also options, although Fulton says to make sure to check their reviews to see what customers say about them.
Physically Backed Gold ETFs
There are also exchange-traded funds that are backed by physical gold stored in vaults. The largest of these, based on assets under management, is SPDR Gold Shares (GLD), followed by the iShares Gold Trust (IAU).
“These are listed vehicles that track the price of gold with very little error and low management cost,” Accomazzo says.
Gold-Mining ETFs
Other ETFs invest in shares of gold-mining companies. These provide instant diversification among companies in the industry under a single ticker symbol. Mining companies can outperform gold prices as their free cash flow rises compared with relatively fixed mining costs. Some can also ramp up production to sell more gold when prices are higher.
For ETFs that invest in gold shares, Mahaffy points to the VanEck Gold Miners ETF (GDX). He also notes that Newmont Corp. (NEM), the biggest gold mining company in the world, has a good bit of exposure in North America, which is a less volatile jurisdiction than some other areas where government confiscation of mines is more of a threat.
Gold Futures and Options
Investors can also consider gold futures, but these are more sophisticated vehicles that involve leverage that can magnify earnings but also losses. You’ll also have to get special permission from your brokerage to trade futures.
“I only recommend trading gold futures and options for sophisticated gold investors who have an understanding of derivatives,” Ebkarian says.