The investment demand for gold is increasing as investors flock back to gold, which is driving the metal’s price even higher. The precious metal’s current performance began in 2015 when the Fed initiated its rate-hike cycle. During the years since, gold has gained significantly, with its best gain extending to 96% in August 2020.
Weakening stock markets also bolster investment demand for gold by boosting its use in the diversification of portfolios. This is because the precious metal rallies during stock-market selloffs, making it a good portfolio stabilizer. Investment buys then accelerate the upside momentum of gold, which helps attract even more investors.
Geopolitical fears that increased earlier in February of this year also boosted gold’s rally, after Russia invaded Ukraine. The price of gold after the invasion had increased to $1,899. This surge continued well into March, with the price rising to $2051, driven mainly by speculators flooding into gold futures and increasing uncertainty following Russia’s declaration of war against Ukraine.
Inflation is also eroding purchasing power, which has prompted many to rush to gold as a safe haven asset. While high levels of inflation and rate hikes by the Federal Reserve are bearish for overvalued stock prices, they are very bullish for gold. Investors usually add gold to stabilize their bleeding portfolios when stocks get weaker in bear markets.
Historically speaking, rate hikes by the Fed have always been bullish for gold. The primary reason why this particular precious metal thrives during these cycles is because it’s bearish for stocks. Gold performs best when it enters these cycles when they’re gradual and relatively low.
The combined holdings of physical gold bullion of the dominant and leasing IAU iShares Gold Trust and American GLD SPDR Gold Shares gold-exchange-traded funds mirror global investment flows into gold. They reveal if American stock-market capital is flowing out of or into gold. When the precious metal is moving, IAU+GLD holdings dominate quarterly investments into gold.
However, investment capital inflows into gold across the globe aren’t easy to track. To address this, GLD+IAU holdings track comprehensive global demand and supply data for gold in nearly every quarter, making it a near real-time window into how investment demand for gold is faring. Every quarter, the World Gold Council also publishes a report on this data.
Strong investment demand for gold is expected to persist for years, given the raging inflation and weaker stock prices. The long-term winners are likely to be companies such as Royal Gold Inc. (NASDAQ: RGLD) whose stocks could soar as the price of physical gold rises.
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