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  • Writer's pictureRealFacts Editorial Team

Understanding the Surge in Gold Prices: Drivers and Investment Opportunities

Gold bars and coins

Recently gold has surged to record highs, defying conventional expectations amidst equity markets that are also performing well. This doesn't happen as gold is mostly used as an alternative or more so a safe haven against inflation and an uncertain market however this is not the case this year. This phenomenon, which has been driven by a confluence of factors, demonstrates complex dynamics shaping global economies and financial markets. We will discuss the multifaceted reasons behind the ascent of gold prices, the implications for investors, and the diversified avenues available to capitalize on this trend.

Gold's trajectory is intertwined with macroeconomic indicators and geopolitical uncertainties. Notably, several factors have catalyzed the surge in gold prices these past 2 years. Which is the most common reason for a surge in demand for gold. 

1. Inflation Expectations: Heightened inflationary pressures have propelled investors towards safe-haven assets like gold, seeking refuge from eroding purchasing power. 

2. Weakening US Dollar: The depreciation of the US dollar, coupled with concerns over fiscal policies, has amplified gold's allure as a store of value. 

3. Financial and Geopolitical Uncertainty: Mounting geopolitical tensions and financial instability have bolstered gold's appeal as a hedge against uncertainty and crises. 

One factor that has driven the demand and doesn't usually happen is that central banks have embarked on a significant buying spree of gold since the early 2000s, after the

bubble, and accelerating notably in recent years. There has been a surge of net purchases, reaching record levels in 2022 hitting 1,082 tonnes and in 2023 with 1,037 tonnes being bought by these central banks. 

This spree reflects a strategic diversification away from heavy reliance on the US dollar. Banks found themselves over weight on the USD and needed an asset with no credit risk. According to a survey from the World Gold Council they found the top reasons banks were doing this were listed as most popular respectively: the historical position, performance during times of crisis, long-term store of value / inflation hedge, etc. During a crisis gold renders as an attractive addition to central bank reserves, or just as a hedge against vast amounts of risk.

Recent geopolitical developments, particularly US sanctions against Russia amidst the Ukraine conflict, have underscored vulnerabilities associated with excessive reliance on the US dollar. Foreign central banks, wary of potential freezing of USD reserves, are increasingly gravitating towards gold to assert control over their assets. This shift signifies a broader trend towards de-dollarization, wherein gold serves as a viable alternative reserve asset. 

In China, most investors tie their money into real estate which has been underperforming for them as well as their notoriously poor performing stock markets. This has increasingly turned investors to buy gold amid market uncertainty. Similar trends are observed in India and the Middle East, many investors find themselves using gold as a hedge and a way of safely storing capital. Along with seasonal factors such as the wedding season have increased demand for physical gold bars. 

Amidst soaring demand, gold mining faces several cost challenges, and as a result have underperformed the demand. Depletion of high-grade deposits/mines necessitates exploration in remote locations, driving up costs, or causing them to dig deeper or settle for lower-grade deposits. The exploration, time, and money spent for mining these lesser-grade deposits have increased the costs to mine gold. Moreover, rising labor, energy, and transportation expenses, from inflation, has put pressure on the total cost of mining. 

Many are not aware that many countries or jurisdictions charge royalties on what is mined. For example “The West African nation increased the minimum royalty rate for spot price above $1,500 an ounce to 6% from 5%, the military government said in a decree seen by Bloomberg. The rate will rise to 6.5% for spot higher than $1,700 to $2,000 and further to 7% for spot above $2,000.” This means that before when gold was sold at $1,500 West Africa took a 5% cut now that cut is 6% and if gold prices go higher sold from that area then the royalty increases. 

With the increases in exploration, labor, energy, and transportation costs compounded by increasing government royalties, pose operational hurdles for miners, and cut into their net margins. Even with increased demand the costs are still netting them about the same margins as before. However, the surge in gold prices presents lucrative opportunities for gold mining stocks and investment vehicles.

Investors seeking exposure to gold have an array of options to list a few: 

1. Gold Miner Stocks: Companies such as AngloGold (Ticker: AU), Caledonia Mining (Ticker: CMCL), Newmont (Ticker: NEM), and Compañía de Minas BuenaventuraA (Ticker: BVN). These stocks offer exposure to gold mining that have good financial health and good potential future. 

2. Physical Gold ETFs: Exchange-traded funds (ETFs) like GLD, IAU, and GLDM provide indirect exposure to physical gold. These funds physically buy gold and store in vaults, offering liquidity and diversification benefits. 

3. Buying Physical Gold: Direct ownership of physical gold grants tangible reassurance but may entail liquidity constraints compared to ETFs. 

The surge in gold prices reflects a complex interplay of macroeconomic, Global, and regional, and operational dynamics. As investors navigate uncertain waters, gold emerges as a steadfast haven of stability and value preservation. Whether through gold miner stocks, ETFs, or physical ownership, prudent investment strategies can harness the potential upside of gold's ascent while mitigating inherent risks. In an era of heightened volatility and uncertainty, gold shines as a timeless beacon of resilience in the ever-evolving landscape of global finance.

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