Introduction to Gold Prices
The price of gold has surged above US$4,100 (A$6,300) an ounce, marking a significant milestone in its extraordinary rally this year. This upswing has been much faster than analysts had predicted, with total gains nearing 100% since the current run started in early 2024. The soaring price of gold has captured investors’ hearts and wallets, resulting in long lines of people forming outside gold dealers in Sydney to get their hands on the precious metal.
What Explains the Soaring Price of Gold?
Several reasons have been suggested to explain the current record run for gold. These include greater economic uncertainties from ballooning government debt levels and the current US government shutdown. Additionally, there are growing worries about the independence of the US Federal Reserve, which could lead to a resurgence in inflation if interest rates are pushed down. Gold is traditionally seen as a hedge against inflation. However, these factors are unlikely to be the main reasons behind the meteoric rise in gold prices.
The Role of Gold Exchange-Traded Funds (ETFs)
A more likely explanation for the current gold price rally is growing demand from gold exchange-traded funds (ETFs). These funds track the movements of gold and are traded on the stock exchange, making assets such as commodities more accessible to investors. Before the first gold ETF was launched in 2003, it was considered too difficult for regular investors to get gold exposure. Now, gold ETFs are widely available, and gold can be traded like any other financial asset.
Emerging Market Economies and Gold
In addition to retail investor demand, some emerging market economies – notably China and Russia – are switching their official reserve assets out of currencies such as the US dollar and into gold. According to the International Monetary Fund, central bank holdings of physical gold in emerging markets have risen 161% since 2006 to be around 10,300 tonnes. This shift is largely driven by the increasing use of financial sanctions by the US and other governments that represent the major reserve currencies. Russia and China are leading this shift, with Russia becoming a net buyer of gold in 2006 and accelerating its gold purchases following its annexation of Crimea in 2014.
Could Gold Have Further to Run?
Ongoing demand from Russia and China, and investor demand for gold ETFs, means the gold price could rally further. Both factors represent sustained increases in demand, in addition to existing demand for jewelry and electronics. Further price rises will likely fuel increased ETF inflows via the “fear of missing out” effect. The World Gold Council reported record monthly inflows in September, with ETF inflows topping US$26 billion for the September quarter and US$64 billion for the nine months to September. Analysts at Goldman Sachs have already revised up their price target for gold to US$4,900 an ounce by the end of 2026.
Why Gold’s Rise is a Win for Australia
The current gold rally means good news for Australia, the world’s third-largest producer of gold, with at least 19% of known deposits. As the value of gold exports is expected to overtake liquefied natural gas exports next year, gold will become Australia’s second-most important export behind iron ore. This increase in gold exports will have a positive impact on Australia’s economy, making the country a significant beneficiary of the gold price surge.
Conclusion
In conclusion, the surge in gold prices can be attributed to a combination of factors, including growing demand from gold ETFs and emerging market economies. As the world’s third-largest producer of gold, Australia stands to benefit from further increases in gold prices. With the value of gold exports expected to overtake liquefied natural gas exports next year, the gold price rally is a significant win for Australia. As the demand for gold continues to grow, it will be interesting to see how the price of gold evolves in the future and what impact it will have on the global economy.
