Is the 2024 Gold Rush a Warning to the US Economy?

Have a look at this price chart over the last 2 years. Up 65% phenomenal growth!

Now, with returns like that, you'd probably expect it to be some sort of up-and-coming tech stock, right? One with a foot in the door of the artificial intelligence Gold Mine. Hex! 65% in 2 years is the same as Google and Apple's return over that same period. But it might surprise you to hear that this amazing new tech stock is actually nothing of the sort.

This is the price for gold! Yes, the shiny metal that sits there and does nothing, has seen its value a whopping 65% in 2 years, propelling the spot price to around $2,660 an ounce, which is basically an all-time high. But why?

So, in this video, we're going to take a look at why gold is providing investors such incredible returns at the moment. Is it overblown, or is the gravy train just getting going?

So, in terms of a financial asset, gold is a pretty easy one to understand. It's an AE that gets mined, crushed, separated, and then smelted into beautiful shiny bars. They look like this. About 45% of the world's gold is used specifically for the purpose of being a financial asset, i.e., it's held in bars or coins as a store of value. Then about half of the world's gold is used for jewelry, also a sort of pseudo-financial asset.

And then the rest is used in the manufacture of electronics. All in all, it's a reasonably useless metal outside the electronics sector. It mainly just looks good, and because of that and its relative scary necessity, we assign it value—$2,660 per ounce to be exact.

But why is the price so high right now? Well, the truest answer is that there is no reason, and this is what I find really interesting about financial markets. Because gold, being a nonproductive asset, has absolutely no intrinsic value outside of maybe its use in electronics. It's a similar asset to Bitcoin; they don't produce cash while you hold them as an investment.

The only way to make money is to hope that eventually someone will offer you more for your gold or Bitcoin than what you originally paid. Now, that's very different to say owning shares in a business or a rental apartment or a farm. They are cash-producing assets.

During the time you own them, they are productive and they generate money for you, the owner. Cash-producing assets change price due to both short-term investor sentiment and longer-term changes to intrinsic value. Whereas non-cash producing assets change price just based on investor sentiment alone.

So, in reality, there is no huge reason why the price of gold should rise or fall as it does; it just comes down to the faith that we as humans put in it as a financial asset. As you can see from the long-term price history of gold, from around 2013 to 2016 people were convinced gold was less and less valuable and the price fell.

Whereas since really late 2022, investors have been incredibly excited about the prospect of holding gold, and the prices shot up rapidly. So, the price of gold changes based on what humans think it's worth at a given time, but it's not really a particularly interesting conclusion to a YouTube video.

So, for the rest of this video, let's actually explore why we as humans like to invest in gold. What the hypotheses are, and then based on those reasons, we can explore why gold is trending up so fiercely at the current time.

You might have heard that gold is an asset that investors love to buy during times of economic uncertainty, and that's one of the core reasons that the price of gold has risen, particularly over the past few years. There's been inflation; there's been wars; there's been other geopolitical issues; there's been talks of recessions.

There's fears of a slowdown to economic growth. We've even had some shaky moments in the US banks over the last few years, and all of this, from a purely psychological or behavioral rationale, has likely influenced many investors to buy back into gold because of the consensus that gold is a safe store of wealth in economic periods that isn't tied to a particular currency or economy.

As you can see, after the Great Depression, gold prices skyrocketed during the massive supply shocks and the inflation waves of the 1970s and early 80s. Gold skyrocketed coming out of the bursting of the tech bubble. Gold skyrocketed in the years after the global financial crisis. Gold skyrocketed, and right now, gold is skyrocketing once again.

But beyond a general psychological acceptance that gold prices rise during times of economic uncertainty, there are actually a few economic reasons why right now, investors are deciding to buy more gold. The first is inflation.

Now, I don't need to get into the inflation situation in too much detail, but it's no secret that since 2021, inflation has really ripped in most western economies around the world, and particularly in the United States. During periods of inflation, the purchasing power of fiat currencies like the US dollar decreases, meaning your dollar is able to buy value less and less as time goes on.

So, investors believing inflation will continue at a high pace will convert their US dollars or their pounds or their dollar dues into gold to try and bypass this weakening in the currency. The thought is that if gold retains its value as a commodity, then even if your currency devalues, say 20%, thanks to inflation, which is what we've seen happen to the US since the pandemic, when the investor sells their gold, because it has retained its value, the investor will suffer no ill effects and should be able to sell it and receive 20% more money than they outlaid to buy it.

For example, let's take an investor that converts $100,000 at the onset of the pandemic and puts that fiat currency into gold. At the time, that would buy them 66 troy ounces of gold, just over 2 kg of gold. Now, if we look at the Consumer Price Index, which is the main measure of inflation in the US, that index has risen 21.5% in total since 2020.

So, the dollars in American consumers' wallets have lost roughly 21.5% of their purchasing power over about 5 years. But if you were to take your 66 troy ounces of gold that you bought for $100,000 in 2020, if you took those 66 troy ounces of gold back to the market today and sold them, you would come home with $177,900.

That's obviously a gain of 77.9% in roughly 5 years. So, inflation eroded the value of the US dollar by 21.5% in total over that time, but by buying gold, you come out with 77.9% more US than you started with. Thus, your wealth has been preserved, plus some.

So, that is one big factor behind investors buying a lot more gold over the past few years and sending the price up, but there's more layers. Another reason behind the surging price of gold over the past few years has been central bank gold purchases.

Now, because the US dollar is the world's accepted reserve currency, a lot of countries over time have accumulated high amounts of US government bonds. It's considered the lowest risk investment out there—an IOU from the US government that's as good as money.

Sir, those are IOUs, the leaders of the world economy. It's the closest thing to a sure bet that exists today. And as you can see through this data from the Federal Reserve themselves, countries like Japan, China, the UK, Luxembourg, the Cay Islands, Canada, and so on are all really major holders of US debt.

But more recently, there has been an ongoing shift from countries like China, Russia, India, and so on to be more diversified and less reliant on US bonds. So, more and more, these countries have been looking to other assets to try and preserve their wealth, and one of the assets that they turn to, you guessed it, is gold.

As you can see in this table here, Russia, China, Turkey, India, and so on have really been buying lots of gold over the past 10 or so years. But there are two big outliers in that list—China and Russia.

Why are they buying so much gold? Well, of course, it's because of their geopolitical issues with the United States. Russia has already been hit with massive economic sanctions from the US, and with the trade war continuing between the US and China, it makes sense that China is protecting itself from suffering a similar fate.

They need to store their wealth away from the US dollar so that should America get very angry, they wouldn't be able to inflict as much economic pain. But, of course, one of the byproducts of this situation is that these countries are buying a lot of gold.

When demand goes up but supply stays steady, then prices rise, so that's another big reason why the price of gold is skyrocketing up. But then, a third key reason why the price of gold continues to rise is what's happening over in America in terms of interest rates and monetary policy.

What we've seen over the past few years is a tightening of monetary policy where interest rates are raised. But now that the labor market is showing signs of weakening and inflation has cooled considerably, the Federal Reserve has decided to shift monetary policy and begin to lower rates.

This lowering of interest rates has three effects on gold investors. Firstly, as interest rates fall, the return on interest-bearing assets like government bonds decreases, making gold more attractive.

So, the return for low-risk bonds starts to fall and, naturally, the opportunity cost of holding gold comes down. So, more money starts to flow into other assets like it. Secondly, expansionary monetary policies or a period where interest rates are coming down can sometimes lead to higher inflation or at least the expectation of inflation.

And if that starts to happen, we get back to the very first point of the video where more investors will flock to gold as they try to hedge their portfolios against this expected rise in inflation, so they can also drive gold prices higher.

Then, the third idea is around the weakening of the currency. Lower interest rates, of course, can lead to a depreciation in the US dollar as investors start seeking higher yields elsewhere. Since gold is priced predominantly in US dollars, a weaker dollar makes gold cheaper for foreign buyers, which can then further increase that global demand and can push gold prices higher.

So, overall, they're the reasons why gold prices are currently surging. But I guess the last question is: Well, is the gold price expected to continue rising? And obviously, the answer is: Well, no one knows for certain. At the end of the day, it comes down to investor sentiment.

But I won't lie; there are a number of forces working together at the moment to support the price of gold. Large quantities of foreign buying, the lowering of interest rates in the United States, and expectations of higher for long inflation all work together and, as we've seen, have pushed the price of gold to the highest point it's ever been.

But definitely let me know what you think of gold. Does it hold a place in your portfolio? Are you buying at the current time? Do you not buy gold? Personally, I've actually never bought gold, and it's not that I have anything against gold.

It definitely has its place in certain people's portfolios; I get it. But for me, it always just comes back down as this. This is the reason that I haven't bought Bitcoin either. It comes back down to the idea of owning cash-producing assets versus non-cash-producing assets.

And honestly, I have never bought any non-cash-producing asset. Well, that's if you don't count my Star Wars Lego collection, which is sitting proudly at my parents' house even though I'm almost 30 years old.

But with that said, definitely let me know your thoughts and opinions down in the comment section below. Also, just a quick reminder, if you did want to go in and learn the complete Warren Buffett way of analyzing cash-producing assets like shares, then definitely check out Introduction to Stock Analysis down in the description over on New Money Education.

That is the business that I started last year. We're coming up on the one-year birthday of New Money Education. We've got so much great feedback for that course in particular, so over 6 hours, it takes you step-by-step through the full Warren Buffett strategy.

Everything you need to know, every bit of analysis, three different valuation techniques, how to read financial statements, what you need to look for in the financial statements, it's all in there.

So, please check it out. It's also a really good way if you wanted to support this channel; that's the way to do it. We don't run a Patreon here; I don't ask for donations or anything like that. So, if you didn't want to support the channel out and you like what we put out for free here on YouTube, then please consider checking out those courses.

But guys, with that said, thank you very much for watching. I hope you enjoyed this video. Let me know what you think down in the comment section below, and with that said, I'll see you guys in the next one.