Gold price glitters as traders bet big on falling interest rates

Gold is glittering in the eyes of the markets. The precious metal, object of desire, useful electrical conductor – a favourite of jewellers and makers of dental fillings – is approaching Pepper X chili levels of heat.

It surged to as much as $2,111 per troy ounce in early trading on Monday – a record price – before slipping back a little. It is worth remembering, however, that today’s money is worth a lot less than it was during the pandemic, when gold was last this high. It would need to go higher still to reach an inflation-adjusted record.

It might do that. In theory, gold should have been unloved during the recent interest rate cycle. It pays no dividend. In fact, there is a cost to holding it in terms of storage and insurance. Higher rates ought to make for more attractive places to store money.

But as the world’s central banks were turning on the pumps, Russia launched its bloody conflict in Ukraine, which contributed greatly to the inflation that rate rises were seeking to combat. More recently, the Middle East has flared up as a result of Hamas’s bloody actions in Israel and the latter’s inevitable response.

Gold still retains “safe haven” status, a place for skittish investors to run and hide until tensions ease. Regrettably, there is not much sign of the latter.

A more recent drive for gold price rises is that traders have begun to anticipate the US Federal Reserve cutting rates in response to a faster-than-expected decline in inflation. This has also had a marked impact on the dollar, which has been falling against a basket of rival currencies.

“Nearly all the world’s commodities are priced in dollars,” explains AJ Bell’s investment director, Russ Mould. “A weaker dollar makes gold more attractive/affordable and historically commodities in general have had a negative correlation with the dollar, for this reason.”

Possible rate cuts will be of great interest to anyone looking for mortgages or loans. A fall in rates can’t come soon enough for borrowers.

However, the Bank of England has, repeatedly sought to curb the markets’ enthusiasm. So has the Fed. Far from heralding a cut, its chair Jay Powell cautioned on Friday that the work of combating inflation may not yet be complete. “It would be premature to conclude with confidence that we have achieved a sufficiently restrictive stance, or to speculate on when policy might ease,” he warned.

Philip Shaw, Investec’s chief UK economist, nonetheless says his team is “pretty convinced that central banks will have to start cutting rates next spring as inflation seems to be coming down more rapidly than central banks have been forecasting”. However, he still suspects that the recent market moves are “a little overdone”.

He is probably correct; there are three certainties in life – death, taxes and markets getting overexcited, followed by a correction.

Don’t expect any early Christmas presents from the Fed or the Bank of England’s rate-setting Monetary Policy Committee; they are much more likely to seek to further damp down the markets’ excitement once again.

Still, if Shaw is right, and if inflation continues to fall, borrowers can at least hold out hopes for a happy Easter.

Does this all mean gold’s rise will run out of steam? Not necessarily. Sadly, the two biggest global flashpoints show no signs of calming in the short term. Gold’s status as a safe haven will serve it well until they do.

Does the same now also apply to Bitcoin? The cryptocurrency’s price has surged above $40,000. Mould says it could be viewed as “digital gold in the eyes of some, perhaps”.

There is an important difference between gold and Bitcoin. We can leave it to legendary investor Warren Buffett to explain: “If you said … for a 1 per cent interest in all the farmland in the United States, pay our group $25bn, I’ll write you a cheque this afternoon… I now own 1 per cent of the farmland. You offer me 1 per cent of all the apartment houses in the country and you want another $25bn, I’ll write you a cheque, it’s very simple. Now, if you told me you own all of the Bitcoin in the world and you offered it to me for $25, I wouldn’t take it... because what would I do with it?”

Gold won’t produce a yield like Buffett’s farmland or apartments, but it will always be in demand. You can’t say that about Bitcoin. However, similar things have been said about crypto and nothing has cooled the ardour of cryptocurrency enthusiasts.