Is gold overvalued or could it rise?

Today’s price is very likely to look like a bargain in the not-so-distant future

This question is at the heart of many conversations I’ve been having recently with clients and friends. The way I like to answer is with another question: expensive compared to what?

Despite its recent rise to record highs, there are compelling reasons why buying gold now is a prudent decision, with strong indications that its value is about to rise even further. Making investment decisions solely based on the current price of any asset without considering its underlying value or future potential can be a very costly mistake.

On the one hand, it’s obvious that there is a reason why gold has soared to these new levels. In fact, there are many reasons, and they are all likely to become increasingly important and clear to more and more people in the coming months and years. For example, it is already (or should be) blatantly clear to every thinking person that inflation is not under control. Prices in the real economy, as opposed to cherry-picked and extremely unrepresentative CPI metrics, have been rising steadily and pushing countless families to the brink.

This will only get worse as central banks around the world have already paved the way for a policy turnaround and a return to expansionary monetary policies, including quantitative easing and near-zero interest rates, in order to stimulate economic growth, or the illusion of this (a very useful maneuver in a global election year like 2024). These measures invariably lead to a further devaluation of fiat currency and the erosion of purchasing power. This, in turn, is also very useful when it comes to the unsustainable debt burden that most advanced economies are saddled with – another big boost during the election season. Gold, on the other hand, maintains its intrinsic value over time, making it an attractive alternative to fiat currencies.

Central banks themselves obviously understand the implications of their own policies better than the average investor and this is why they have always increased their gold reserves in times of turbulence and in times of loose money. In the early days of the pandemic, and again after Russia’s invasion of Ukraine, global central banks continued to increase their gold holdings while ETF investors were selling theirs. Now, once again, we are seeing a strong trend of outflows from ETFs. February marked the ninth month in a row, but the price is still rising.

As Simon White, macro strategist at Bloomberg, highlighted:

“Over the past six months, China, Germany and Turkey have increased their gold holdings the most (these are official holdings – when it comes to China, their true holdings are probably much higher than stated). Central banks want gold because it is a hard asset, it is not part of the financialized system when owned definitively. But the dominant reason is the desire to diversify away from the dollar. If you are not on friendly terms with the US, then it is a way to avoid having your reserve assets seized, as happened with Russia.”

This last point gives us a glimpse of a much bigger picture that investors need to keep in mind: geopolitics. It is difficult to think of another time in our post-Cold War history when the world was so bitterly and so dangerously divided. The way the West responded to the Russian invasion of its neighbor by weaponizing the US dollar and the entire banking system has caused many countries to think twice about how to safeguard their own assets. The obvious answer is gold, and that is what is behind this monumental transfer of real wealth that we are now seeing from West to East. In February, China’s central bank added gold to its reserves for the 16th consecutive month and shows no signs of stopping its buying spree as it is clearly on a mission to diversify its holdings and reduce its dependence on the US dollar.

And it’s not just the Chinese central bank that’s buying. According to the Financial Times, “In recent months, the precious metal has gained a second wind with what analysts describe as “phenomenal” purchases by Chinese consumers looking for a safe place to park their money after local stock and property markets crashed. They fell”. As ING analysts confirmed in a note, “We expect gold prices to trade higher this year as safe haven demand continues to be supportive amid geopolitical uncertainty with ongoing wars and upcoming US elections.” .

This is clearly a long-term shift in the gold market and the dynamics behind it have the potential to support much higher prices than what we are currently seeing. This is precisely why investors need to look at the bigger picture and consider current levels in their appropriate content and time horizon.

In other words: sure, gold may seem expensive today, but today’s price is very likely to look like a bargain in the not-so-distant future.

Nothing new under the sun.

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By Claudio Grass

Originally published at: https://encurtador.com.br/bdHS0