In April, I published an article titled The Gold Investing Madness Is Just Getting Started. At that time, gold had broken out of a four-year trading range, reaching an all-time high of around $2,200 per ounce, coinciding with the excitement of college basketball’s March Madness. This surge was fueled by foreign central banks buying gold at an unprecedented rate to reduce their reliance on the U.S. dollar. Despite these developments, the Federal Reserve had yet to cut interest rates, the dollar remained strong, and U.S. investors continued selling off their gold ETFs. Given this combination of factors, I believed the “madness” was just beginning and that shifts these macro-economic conditions could quickly turn in gold’s favor.
Fast forward to today, and gold is trading at around $2,650 per ounce—a more than 20% increase! What has fueled this next leg higher? The same catalyst that originally broke gold out: foreign central bank buying, which remains robust and perhaps even understated. Additionally, two of the three previous headwinds have now become tailwinds: the Federal Reserve has begun cutting interest rates, and the dollar has started to weaken. Let’s dive into each of these factors in more detail.
On the central bank front, the first half of 2024 saw another period of record demand from foreign buyers (source: World Gold Council). This buying has been driven by both adversarial countries like China and Russia, as well as allied nations such as Poland. The National Bank of Poland was the largest buyer in Q2, with gold now comprising 13% of their total reserves. The Reserve Bank of India has added gold every month in 2024, with year-to-date purchases totaling 37 tons—surpassing their annual totals for both 2022 and 2023. According to BofA Securities, gold is now the second-largest reserve asset globally (16.1% of reserves, compared to the Euro at 15.6%), following the U.S. dollar.
While this activity is impressive, there is reason to believe that much more is on the horizon—or possibly going unreported. China, previously the largest foreign buyer of gold, paused its purchases in May 2024, with gold still accounting for only 4.9% of the People’s Bank of China’s total reserves. Even more intriguing are recent reports suggesting that Saudi Arabia has been secretly buying gold in Switzerland. Since early 2022, it is believed that Saudi Arabia has purchased 160 tons of gold. Notably, the Saudi central bank last updated its official gold reserves in 2008, when it held 332 tons of gold. Anecdotes like these make it hard to believe that central bank gold purchasing is anywhere near its end, or that we fully understand the extent of what is happening behind the scenes. With potential underreporting and continued interest from both friendly and adversarial nations, the scope of central bank demand for gold may be far greater than currently recognized.
New tailwinds to the gold thesis include Federal Reserve rate cuts. On Wednesday, September 18th, the Fed cut interest rates by 50 basis points, an action front run by the market as 2-year interest rates had already dropped from 5% to 3.5% between May and September. It’s important to note that the Fed has effectively declared victory over inflation, even though it remains well above the 2% target. At Proficio, we subscribe to some of the top inflation forecasters, many of whom predict inflation could make a run back towards 4%. A Fed cutting interest rates while inflation stays elevated will result in suppressed long-term real rates (interest rates minus inflation), creating a bullish environment for a non-yielding asset like gold.
Another key catalyst driving gold higher has been the significant weakening of the U.S. dollar, a topic I recently covered in an article titled America’s Currency Crisis: Declining Global Confidence In The Dollar. To summarize, the U.S. continues to run a growing budget deficit, now approaching $1.9 trillion[1], alongside an enormous national debt exceeding $35 trillion[2]. Additionally, the U.S. has maintained a trade deficit for over five decades. Combined with escalating geopolitical tensions, these factors have motivated BRICS+ nations to reduce their reliance on the U.S. dollar. What is the perfect alternative, untethered to any country’s debt? Gold.
I believe the three catalysts I’ve highlighted—central bank buying, Fed interest rate cuts, and a weak dollar—are all still in their early innings. However, one major catalyst has yet to materialize: retail participation through U.S. ETF gold buying. Despite gold having a market cap of over $17 trillion[3], sitting at all-time highs, and being uncorrelated with stocks and bonds, it has garnered little attention. A study by State Street Global Advisors and the World Gold Council in Q4 2023 found that a third of financial advisors in North America allocate less than 1% of assets under management (AUM) to gold, while 56% allocate between 1% and 4.9%. As my followers know, my research this year has recommended portfolios hold more than 20% in gold. When retail and institutional investors eventually enter the market—and I believe they will—my next article might just be titled “The Gold Madness is MADNESS.”
Buyers beware: October is typically a challenging month for gold, historically speaking. Since 1968, gold has posted only a slightly positive average return during the month, with a median return in the negative. Add to that the upcoming election and excessive optimism around rate cuts already priced in, and it’s possible we could see moments of weakness in gold. In my view, these dips should be seen as opportunities—stay disciplined and accumulate your gold exposure. Gold bull markets are structural by nature, and we’re likely in it for the long haul. As I said back in April, play along—these are exciting times.