Is gold ready to rip?

Ole Hansen
Head of Commodity Strategy

Summary:  Will 2024 be the year of the metals? Gold has just reached a fresh record high driven by strong retail demand and record central bank buying. With the prospect for rate cuts in the US later this year, further strength could lie ahead.

How to invest/trade gold:

Physical gold: Purchasing physical gold in the form of jewellery, coins, or bars provides direct exposure to the metal but involves considerations such as secure storage, insurance, and higher trading costs.

Gold ETFs/ETCs: Exchange-traded funds or commodities offer a convenient way to invest in gold without holding physical metal. These products track gold prices closely and can be traded easily on exchanges.

Gold mining stocks/ETFs: Investing in gold mining companies or ETFs that hold a basket of mining stocks provides exposure to gold prices. However, these investments carry operational risks and may exhibit higher volatility compared to gold itself. Since 2022, when the US Federal Reserve began hiking rates to curb soaring inflation, gold miners have struggled relative to the price of gold amid rising costs towards financing, labour, and materials. The weakness seen during the past few months has left the sector increasingly undervalued relative to the gold prices hitting fresh record closing highs.

Gold futures, CFDs, and options: 
Trading gold futures, contracts for difference (CFDs), or options involves higher risk due to leverage. While these products offer opportunities for speculation, they also require careful risk management to mitigate potential losses.

The COMEX gold futures has a contract size of 100 troy ounces, and with a current price around USD 2,100 per ounce, a contract value of USD 210,000. Being a leveraged product, the buyer or seller of a futures contract has to provide less than USD 10,000 as collateral, leaving the owner of the position highly exposed to losses without proper risk management. CFDs track the futures price with the main difference being the ability to trade smaller quantities than the 100-ounce futures contract.

Spot gold trading: another leveraged product that may suit traders using risk management tools while long-term investors may find ETFs being the better option. At Saxo you can use leverage to trade on the price of gold against 12 different currencies – including US dollar, euro, yuan and Swiss Franc – and silver.

Which factors drive gold?

Monetary policy: The policies of the US Federal Reserve, including interest rates and inflation targets, significantly influence gold prices. As gold does not yield interest, rising interest rates increase the opportunity cost of holding gold, often leading asset managers to reduce their exposure to real assets.

Currency fluctuations: Gold prices typically exhibit an inverse relationship with the value of the US dollar. A weaker dollar tends to drive gold prices higher, and conversely, a stronger dollar can suppress gold prices.

Real bond yields: Gold prices often move inversely to interest rates, as rising rates increase the opportunity cost of holding non-interest-bearing assets like gold. Long-term investors monitor developments in US real yields, which represent the yield on a bond investment adjusted for expected inflation.

Central bank demand: Several central banks have been acquiring gold in recent years to diversify their reserves away from heavy reliance on the dollar. Additionally, gold's lack of credit or counterpart risk makes it a trusted reserve asset globally.

Geopolitical tensions: Gold is considered a safe-haven asset, sought by investors during times of geopolitical uncertainty or crisis due to its intrinsic value and perceived stability.

Speculative activity: Hedge funds and speculators often anticipate and amplify price movements in gold markets based on fundamental and momentum-driven factors.

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