Why the recent gold price surge might be sustainable

The expectation of continued economic uncertainty, inflation concerns and geopolitical risks are supporting bullion

Limited supply of gold, coupled with increasing demand from both investors and central banks, are driving bullion's recent price surge. Pawel Dwulit / The National

Gold prices have seen a significant spike over the past 12 months, reaching all-time highs. This can be attributed to a combination of economic, geopolitical and market factors.

Typically, gold prices surge in times of economic uncertainty and geopolitical tensions as investors flock to the yellow metal as a safe-haven asset.

The global economy has been facing significant uncertainty due the surge in inflation rates and the consequent rise of interest rates, which hit consumer spending and increased the cost of financing for consumers and companies. This has led investment decisions to be postponed.

Rising price pressures in major economies have led investors to seek assets that can be hedged against inflation. Gold has historically been a preferred hedge against inflation.

Geopolitical conflicts and tensions, particularly in regions like Eastern Europe and the Middle East, have also increased demand for safe-haven assets.

Gold's appeal as an investment stems from its role as a store of value.

Key fundamentals driving the surge include:

Supply and demand dynamics: Limited supply of gold, coupled with increasing demand from both investors and central banks.

Currency fluctuations: Depreciation of major currencies, particularly the US dollar, which makes gold cheaper and more attractive to investors using other currencies.

Market sentiment: Positive sentiment towards gold driven by continuing market volatility and economic uncertainties.

The surge in gold prices appears to be supported by strong fundamentals rather than speculative behaviour.

While there may be short-term corrections, the long-term trend for gold remains generally bullish.

However, a speculative element in such a steep upwards trend should not be ruled out.

On the upside, speculators have noticed the consistent volumes associated with the surge and continue to join the buying side to achieve profits.

Meanwhile, on the downside, as speculators may start to unwind their position, which are showing profits, or short the commodity (by selling it without holding a position). This can be done through derivatives, which might lead to increased volatility and temporary, but possible, sharp corrections.

Experts in the financial industry have varied opinions on the sustainability of the gold price surge.

Some believe that the current levels are justified given the macroeconomic backdrop, while others caution that prices might be overstretched in the short term.

Analysts from Goldman Sachs and JP Morgan have predicted continued strength in gold prices, albeit with some potential for volatility.

In my opinion, investors’ strategy should depend on their actual positioning in relation to gold and their exposure to riskier assets and the US dollar.

If investors are already holding a stake of their portfolio in gold, I would consider consolidating the profits as the price rises, rebalancing the portfolio to the initial asset allocation and preferably hold the gains in cash or short-term bonds.

This may impact the maximum profit that an investor could achieve but will reduce the risk of a sharp correction and provide resources to take advantage of a price drop or new opportunities in other asset classes.

Investors who are looking to invest in gold now should exercise extra care and analyse the factors we mentioned earlier as well as look at current short-term price dynamics.

In any case, they must accept the risk of a loss in the short or medium term, which might stem from a price correction. However, it is hard to predict the timing, depth and duration of this correction.

Investors should consider gold as part of a diversified portfolio to hedge against potential market and economic risks, but refrain from being too aggressive and approach the investment in line with their personal risk appetite and related portfolio asset distribution.

Roberto d’Ambrosio is the chief executive of Axiory Global