Gold Hits Yet Another High. Can It Go Higher?

On Tuesday, gold hit a new record high surpassing £2,600 a troy ounce for the first time ever. Happy September everyone. 

Perhaps the most interesting thing about the gold price reaching yet another high, is that everyone who buys now is still early. 

Why do I say this?

Well – for starters – central banks have increased their purchases of gold despite high prices and I have this feeling that the true scale of uncertainty and economic malaise is not fully priced into the price of gold right now. That is perhaps why, as I write this, gold has climbed, climbed and climbed throughout all of Tuesday. 

With gold performing like a top-tier olympic athlete breaking all the records, I will take this opportunity to emphasise the drivers of gold and why the recent gains are part of a broader climb. 

Re-defining of the term “safe haven”

Gold has always been referred to as the safe haven asset of the world. It’s your steady eddy that preserves its value over a period of time (unlike your cash in the bank). 

But, more recent developments have caused previously perceived “safe haven” assets to now be seen as risky. Such assets are US assets. 

By US assets, I mean US government bonds and US dollar denominated assets such as stocks. Why is money pouring out of the US and into true safe haven assets like gold I hear you asking? 

Funny enough, Trump is not the cause of this but rather the catalyst. Nonetheless, the cause is growing government debt. 

In the past, owning US government debt was seen as the ultimate safe haven. This was based on the assumption that the US economy is the strongest in the world, it could always pay back its loans and their currency is the reserve currency of the world. 

Each of those three assumptions are increasingly under threat today. 

Here is a quick graph to really hit home the fact that owning US government debt is no longer the “safe” option. 

I really cannot understate how big this is. Before our very eyes, the status quo is being reversed. 

Therefore, the new all time high for the gold price is not just some short term bullishness but rather the start of the re-defining of what truly is a safe haven asset. 

On the topic of government debt…

Firstly, government debt matters to us all because it has a material impact on inflation (eroding the value of your cash) and on your taxes. Those of us who still live in the UK know all too well the impact of government finances on our taxation. So, the bottom-line is government debt matters!

As I am writing this, the borrowing costs of major economies like the US, UK, Japan and Germany hit historic highs as investors want higher returns to protect against inflation, increased fiscal spending and irresponsible levels of government debt. 

These are all drivers of the gold price. 

This also likely means Rachel Reeves will have to turn the tax dial up a bit. Thanks be to God that we have VAT and Capital Gains Tax free gold bullion assets at Bullion House. 

You want to know something that’ll make you smile? Central banks are still expected to cut rates because of this new era of “fiscal dominance” meaning governments are pressuring central bankers to reduce the debts repayments, by forcing them to lower interest rates like what Trump is doing in America, on the government borrowing. Having already promised more spending on defence and now an ever-increasing uncertain economic outlook from Trump’s tariffs, the trend of governments spending more than they are bringing in is likely to continue. Hence why borrowing costs have gone up as there is now a risk premium. Gold relishes in any environment where the value of money is under threat. And it certainly is now. Remember when I said this is just the beginning? 

“We need more gold” – central banks

Something that is not talked about enough, I believe, is that central banks know what they are doing to the value of money. They know that over the past decade, government policies across the world have caused the value of currencies to be worth less and less over time. The fiscal stimulus during the 2008 global financial crisis and during the pandemic had driven prices and inflation much higher. 

By ordering more gold, the central banks are bolstering their balance sheet with real assets knowing that they have devalued fiat currencies. I am not implying that they have done this knowingly or that it is some deep conspiracy to make everyone poorer in real terms, but the fact is that governments have not allowed firms to fail and have propped up its citizens to prevent great depressions. In 2008, governments bailed out companies that made huge leveraged bets on the housing market. This cost billions of pounds and led to the “printing” of money. In 2020, governments gave out great monetary support to its citizens to maintain their purchasing power. This also cost billions of pounds and increased government borrowing. 

When push comes to shove, nothing beats the age-old audit of “check the vault”. When ancient and medieval kings and queens needed money for war or a new palace, this was what they did. They checked the vault for how much gold they had. None of this modern, printable, easily manipulated paper money rubbish. 

Perhaps another reason why foreign central banks are buying gold is because they see that their peer across the pond is being verbally abused, publicly berated and pressured to set rates at levels the president decrees. 

Who else knows the risk of that better than central bankers themselves?

The future of gold

I subscribe to a financial newsletter to which the sub-title was “Is the yellow metal seeing things other people don’t?” As someone who works in the gold industry day in and day out, for months now I have felt uncomfortable with how stock markets were performing given the backdrop of all the factors mentioned in this piece. I was saying to myself: “why don’t people see what I am seeing??”

Buyers of gold, however, have had a keen eye on inflation, the dire fiscal situation on advanced economies, and Trump’s attacks on Fed independence potentially bringing a premature return to easy money. 

Perhaps it’s because the kids have gone back to school and now adults have started to smell the roses. 

In all seriousness, gold is seemingly the only asset that is materialising the uncertainty that is felt worldwide. To answer the question posed in my own title, gold can absolutely move higher. We can ascertain this by asking ourselves three questions. 

1. Will inflation continue to erode the value of money and will goods become more expensive in the future?
   
   
2. Will there be booms and busts, ups and downs in the future? If so, I know that gold will go up in the future as long as there are cycles. 
   
   
3. If the value of gold has survived centuries of civilisation, will gold continue to maintain its value for my children, grandchildren and great-grandchildren especially in the backdrop of printable money?
   
   

If you answered yes to any of these questions, then to borrow the phrase of commodities strategist at Goldman Sachs, become a “conviction buyer”. Follow your convictions, beat the status quo and make your investment. In the past 10 years, gold has waited for no one. Those who were rubbing their chin and thinking about buying at, then, all time highs and never made the move are probably left jaw dropped right now. Doing nothing is perhaps the biggest risk. 

Don’t be like them.