Finance Why gold has been so “golden” lately In the past, the performance of gold has been strongly tied to the strength (or lack thereof) of the U.S. dollar and, to a lesser extent, to the level of turmoil (both political and economic) in the world overall. This connection is still largely true, but there are now additional macroeconomic issues which are reinforcing or amplifying this tendency. To use a rather tired cliché, this “perfect storm” of conditions seems to be making gold an extremely attractive choice for investors concerned about the state of the economy and the world. These include: Inflation – Coming out of the Covid-19 epidemic, many of the world’s economies have experienced stubbornly high inflation. This is exactly the kind of environment that benefits gold because, historically, gold has been a hedge against currency debasement. As the purchasing power of a dollar (or a euro, or a yen, or a pound, or whatever) declines, the purchasing power of gold tends to remain the same. The longer this inflationary environment persists, the stronger the fundamentals for gold and precious metals. Central bank purchases – Central banks are by far the largest purchasers of gold and precious metals. Over the past few years, many of them (including those in China, Russia, Turkey and India) have been on a record gold-buying spree – in 2022 and 2023, central bank gold purchases hit their highest levels in decades. Most analysts suggest that the move stems from a desire to diversify away from the U.S. dollar, a move that will likely continue as long as the current U.S. administration uses economic pressure to accomplish its political goals. Wars, conflict and uncertainty – We live in interesting times, as evidenced by the ongoing war in Ukraine, continued conflict in various Middle East countries and the rise of a new Cold War between the United States and China. All of this turmoil has driven up demand for “safe haven” assets – gold and other precious metals among them. As the level of conflict continues to rise, it seems at least plausible that gold will continue to do the same. Weakening U.S. dollar – While the U.S. dollar has remained stronger than many Canadian snowbirds would like, it has actually given up some ground against most major world currencies over the past year or so, largely due to the expectations of future rate cuts, along with the massive (and growing) U.S. fiscal deficit and debt. A weaker U.S. dollar makes gold cheaper to purchase for non-U.S. investors (remember, gold is denominated in U.S. dollars) which, in turn, boosts demand. Will such conditions continue? That’s the 24-karat question. While no researcher, analyst or market watcher has a crystal ball, most agree that the above factors will continue to affect the world economy for at least the foreseeable future. That should mean a bright future for gold and other precious metals – at least until underlying conditions change. 28 | www.snowbirds.org
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