Justin Lin
In February, I walked past a bullion dealer in the Sydney CBD with a queue that wrapped around the corner. Gold had just peaked above $US5600 ($7800) an ounce, capping a 12-month run of more than 80 per cent.
Six months later, the queues have gone, gold sits near $US4600, and the question I get from investors has inverted. It used to be: “How high can this go?” Now it’s: “Why did my safe haven fail me during a war?”
It is a fair question. Gold’s first half was a disappointment, but unlike how many investors would paint it, nothing about it was mysterious, nor did it reveal any fundamental flaws in gold.
Consider the starting point. At the beginning of this year, gold had been perhaps the best-performing major asset on the planet for three years, at one point rising more than 60 per cent in six months.
When an asset climbs that fast it attracts a particular kind of buyer – the one who arrives because the price is rising, not because of any particular thesis. Those buyers set the price at the top and are the first to leave.
Then there is the conflict itself. The Iran war has been the most energy-centric war in modern market history, with more than a fifth of the world’s crude and gas exports at risk. That may instinctively read an oil shock as an inflation shock, and inflation as good news for gold.
Central banks have accumulated gold for years as a deliberate act of diversification away from the US dollar.
The market did something less intuitive. It priced in a central bank forced to stay tight, or even hike. Yields climbed, and gold, which pays no coupon, always struggles against a rising cost of holding it.
Finally, amid the clamouring of gold’s failure as a “haven”, it should be noted that nobody truly wanted insurance. Uncertainty hit decade highs, yes, yet equity markets stayed risk-on, propped up by earnings certainty in semiconductors and AI. Investors do not buy a hedge when the thing they are hedging keeps going up.
Three headwinds, all rational, but none a defect in gold.
What has changed, however, is that the froth is gone. The positioning that made gold fragile in February has been cleared out and the price has rebased to a level far easier to defend. Anyone buying today is buying an asset that has had its reckoning.
Meanwhile, the core investment case remains rock steady, and the accumulators that drove gold’s rally before are making their return.
Central banks have accumulated gold for years as a deliberate act of diversification away from the US dollar. That buying slowed in the first half – exactly what you would expect when a war forces policymakers to prioritise liquidity over strategy. But as of August, despite tensions still simmering in the Middle East, central bank buying may have already resumed.
The People’s Bank of China recently extended its streak to 21 straight months in July, adding 20 tonnes, its largest monthly purchase by volume since October 2023. And in the World Gold Council’s annual survey of reserve managers, 89 per cent expected global official gold holdings to keep rising over the next 12 months, while 74 per cent expected the US dollar’s share of global reserves to be lower in five years.
Asian investors, a new force in the market, have proven similarly committed. Regional gold ETFs took in a record $US12 billion in the first half, the largest contribution to global flows, and that held through a brutal June of profit taking. A physical gold fund was, for a while, the largest ETF of any kind in mainland China, bigger than the local equivalent of an S&P 500 tracker.
Which brings us to now. Consolidation is miserable to sit through and obvious only in hindsight, but the conditions that made gold vulnerable have been quietly unwinding. The labour market that spent the first half looking indestructible shed 23,000 US jobs in July.
Markets that had priced a September rate rise as a near-certainty, now put the odds closer to one in three. Gold has climbed about 8 per cent in a month to a 10-week high, and its correlation with oil and equities has drifted back towards zero as key accumulators return.
Six months ago, gold was a crowded trade at a record high. Today, it is an uncrowded one at a discount, with a structural case that has strengthened rather than weakened. The queues outside the bullion dealers may be shorter, but, ironically, now may be the right time to enter the store.
Justin Lin is an Investment Strategist at Global X ETFs Australia.
- Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.
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