Gold’s record run is being fuelled by wars, debt and Donald Trump

Something odd has happened to the gold price this year. It has risen inexorably to record levels, decoupling from its traditional anchors.

Historically, the trend of the gold price has been influenced by macroeconomic factors like inflation, interest rates and the US dollar. It has been broadly correlated with them, rising when inflation is rising and falling when the dollar strengthens and interest rates rise.

Gold Trump Sneaker: The price of real gold has hit records as Trump’s election prospects appear to be strengthening.Credit: AP

Those historical relationships make sense. Gold is regarded as a hedge against inflation. As it is priced in US dollars, investors get less for their money when the greenback rises. Gold generates no income return, so interest-generating assets such as bonds become more attractive when rates are rising.

This year, however – indeed, over the past 12 months or so – the gold price has kept climbing even as inflation rates have tumbled around the world and the US dollar, while volatile, has strengthened. Interest rates have only just started to fall, but have been relatively high for much of the year.

That means the gold price has been driven by other factors.

It does have a strong correlation with sharemarkets. When share prices and those of other risk assets rise (gold has a very strong correlation with Bitcoin), so does the gold price. The US sharemarket is up more than 21 per cent this year, and Bitcoin has jumped 50 per cent.

Gold, which touched another record of $US2759 an ounce on Wednesday before falling back to $US2729.40, has risen almost 32 per cent this year.

The correlation with risk assets has, historically, only been in one direction. The gold price has tended to lift in a “risk-on” environment, when there’s a lot of liquidity flushing around the financial system, but performs as a safe haven when markets are volatile or falling.

Other major factors influencing gold prices are geoeconomics and geopolitics. And both loom large at present.

The US, and indeed the world, are awash with debt.

The International Monetary Fund has warned that global public debt will reach $US100 trillion ($150 trillion) this year, or 93 per cent of global GDP, and perhaps as much as 115 per cent of GDP within three years.

America’s debt-to-GDP ratio is already 99 per cent and, according to the US Congressional Budget Office (CBO), is on its way to 125 per cent over the next decade on existing policy settings.

The CBO has also calculated that, should Kamala Harris win the US presidency and implement her policies, she would add $US3.5 trillion to debt and deficits, lifting the debt-to-GDP ration to 133 per cent. Should Donald Trump win with his agenda, he would add an estimated $US7.5 trillion (and possibly as much as $US15 trillion), and increase the ratio to 142 per cent.

Trump, whose odds of winning appear to be strengthening, would also impose punishing tariffs on America’s trade partners, particularly China, and deport millions of illegal immigrants, sparking a big and enduring spike in the US inflation rate and therefore interest rates in the world’s largest economy.

The levels of government debt around the world and particularly in the US, the cornerstone of the global financial system, have the potential to destabilise the global system and constrict the global economy, which strengthens the case for gold.

There’s also geopolitical factors such as the war in Ukraine and, more recently, the vicious conflicts within the tinderbox that is the Middle East.

The trade and national security frictions between the US and its allies on the one side and the China-Russia axis on the other have been intensifying, and are threatening to create competing blocs, as evidenced by the parallel meetings of the IMF and World Bank in Washington and the BRICS+ countries in Russia this week.

There is a divide of sorts developing between the developed and developing world, with China and Russia trying to pull together the “Global East” and “Global South” – more than 40 per cent of the world economy – into a coalition that could undermine the primacy of the US dollar and the global influence and power the US dollar, with its dominant role in global finance, give America.

The sanctions the West has imposed on Russia (and the US on China), including the freezing/seizure of the Russian central bank’s foreign exchange reserves held offshore, have unsettled countries not closely aligned to the US.

It’s not surprising that central bank reserves of gold have been rising to record levels in the first half of this year.

Ever since Russia’s reserves were frozen, and Russia was cut out of the US dollar-dominated SWIFT global financial messaging system, China has been selling US Treasury bonds and buying gold. India and Turkey have also been prominent gold buyers, along with Middle Eastern countries.

While gold, or any other asset targeted by China and Russia and other members of BRICS+, are unlikely to have any material impact on the US dollar’s primacy in the near term, it could potentially increase the level of “de-dollarisation” in the longer term.

The gold price might also have been helped by Xi Jinping and Donald Trump.

The meltdown of China’s property market and, until very recently, its sharemarket, and the weakness so far of Beijing’s policy responses have destroyed a lot of household wealth in China, where property in particular was the main repository for household savings. In the absence of appealing alternatives, China’s households have been buying increasing amounts of gold.

The spectre of Trump looms large over financial markets. If he pursues his policy of imposing tariffs on everyone and everything, it will be enormously disruptive and destructive for the global economy, including America’s economy.

The implementation of his policy will likely draw a protectionist response from countries around the world, destroying the rules-based global trade order that has driven global growth for decades.

It’s also likely to push up global inflation and interest rates and see the US dollar strengthen because of a combination of higher rates and a “flight to safety” within the traditional safe haven of the US Treasury bond market – even as those bonds would be devalued by the growing US debt and deficits, and resulting massive volumes of new bonds being issued.

The alternate safe haven? Gold, of course.

The Market Recap newsletter is a wrap of the day’s trading. Get it each weekday afternoon.