• The price of gold hit all-time highs this week.
• Falling interest rates and rising geopolitical tensions are increasing gold’s appeal as a safe-haven asset.
• With gold outperforming equity prices since October 2022, Wall Street expects the rally to continue.

The price of gold increased this year.

The precious metal hit a record high of $2,772 a troy ounce this week and has risen in six of the past seven weeks.

With year-to-date gains of about 33%, gold’s returns have outperformed the broader stock market, including the biggest tech. Nasdaq 100by about 10 percentage points.

And since the stock market began in October 2022, gold has outperformed stock gains, returning 67% compared to S&P 500 return of approximately 63%, according to data from YCharts.

These superior yields make the metal one of the hottest investments in the world.

The largest gold ETF, SPDR Gold Shares, has $78 billion in assets under management and has seen inflows of about $5 billion over the past six months, according to data from ETF.com.

Physical gold is also having a moment. Costco has consistently sold out of gold bars when they become available on their site, and Wells Fargo estimates that Costco sells up to $200 million worth of gold bullion and silver coins for its members every month.

It’s been a perfect storm for the yellow metal, and the outlook suggests more gains to come.

Here’s what happens.

Demand from central banks

Global central banks have been on a gold buying spree in recent years.

According to the World Gold Council, central banks purchased a record 483 tonnes of gold in the first half of the year. Central banks in Turkey, India and China top the list of biggest buyers.

Some of the increased demand is from countries looking to diversify their holdings outside of the US dollar.

“We believe the tripling of central bank purchases from mid-2022 on fears of US financial sanctions and US sovereign debt is structural and will continue.” said Goldman Sachs in a memo last month.

This dynamic has been on display since Russia invaded Ukraine in 2022 as America sought to inflict maximum economic damage on Russia through sanctions. But it is harder to implement sanctions against a country that is less dependent on the dollar, and one way to be less dependent on the dollar is to buy gold.

It’s a dynamic the US should monitor closely, according to economist Mohamed El-Erian.

El-Erian wrote in an op-ed for the FT this week, gold’s persistent rally “captures an increasingly persistent behavioral trend among China and ‘middle power’ countries.”

“There is also interest in exploring possible alternatives to the dollar-based payment system that has been at the heart of international architecture for some 80 years.”

Russia has had some success with this, as it managed to steer its economy away from a full-fledged recession after the US imposed sweeping sanctions in 2022.

Russia’s ability to steer its dedollarized economy away from a crisis could give other countries the confidence to reduce their reliance on the dollar, which ultimately benefits gold.

“What is at stake here is not only the erosion of the dominant role of the dollar, but also a gradual change in the functioning of the global system,” El-Erian said. “As it develops deeper roots, this risks materially fragmenting the global system and eroding the international influence of the dollar and the US financial system.

Geopolitical tensions

Gold is considered a good safe haven due to its long history as a stable store of value.

So when geopolitical tensions rise, investors tend to flock to the shiny metal, and right now there’s no shortage of cause for concern.

From Russia’s war against Ukraine to growing clashes in the Middle East to China’s long-standing threat to Taiwan independence, geopolitical tensions are rising, not falling.

Additionally, rising US debt means Treasuries – another historically safe asset – may not be so risk-free anymore.

“Gold appears to be the last ‘safe haven’ asset, encouraging traders, including central banks, to increase exposure.” said Bank of America in a note this month.

The Trump trade

The The Trump trade has picked up steam recently as the former president’s chances of winning the election increased and gold was a big beneficiary.

That’s because a potential Trump presidency is expected to be accompanied by a growing government deficit and a rapidly growing debt pile, which would further fuel concerns about a rebound in inflation and sustainability of the US dollar.

“If you’re worried about fiscal disorder, financial repression and attacks on Fed independence, gold would be an attractive asset,” Capital Economics economist Davix Oxley said on Friday.

Even if Trump doesn’t win the election, the deficit is likely to widen, setting gold up nicely for more gains, according to Interactive Brokers chief strategist Steve Sosnick.

“It’s not like either candidate is preaching fiscal discipline, and the Fed seems willing to continue tapering even if inflation remains slightly above target. So there is the thought that gold could be a viable alternative if rates rise and the economy remains solid. And if the economy isn’t strong, it could still be a good store of value,” Sosnick told Business Insider.

Interest rates

According to data from the World Gold Council, falling interest rates have historically benefited gold prices, with the commodity rising as much as 10% in the six months since the Federal Reserve first cut interest rates.

With the Fed expected to cut interest rates several times over the next year, lower rates should serve as a tailwind for gold prices.

While interest rates in fact, it has jumped since the Fed’s first interest rate cut last month, with the 10-year Treasury yield hitting its highest level since July this week, gold prices continued to rise.

This is a sign that gold investors are more focused on the global interest rate trajectory, which is pointing lower as global central banks look poised to loosen monetary policy.

The People’s Bank of China cut interest rates by 25 basis points this week, while the Bank of Canada cut by 50 basis points. The European Central Bank cut interest rates by 25 basis points last week, and economists say they see the Bank of England set to offer greater rate reductions than previously expected by the markets.