Golds allure has been strong as of late. Prices for the precious metal are up 20% over the last year. Meanwhile, U.S. stocks and bonds have eked out only meager single-digit gains during the same period.
There are many signs indicating that the bull market for gold has plenty of room to run. The recent climb in gold prices was driven in part by economic uncertainty around the world, and terror threats in global hotspots.
There are, however, also good economic fundamentals behind golds strong performance. Demand for gold right now is as healthy as it has been for many years. Its a lesson straight from the pages of an Economics 101 textbook: Prices rise when demand increases.
Demand for gold surged by 21% in the first quarter of 2016, according to a World Gold Council report in May. That was the second-strongest quarter of demand growth for gold on record.
Much of this robust demand is coming from the investment markets. The World Gold Council also reported that investor demand for gold in Q1 of 2016 reached 617.6 tonnes nearly as much as the previous three quarters combined.
Over half of that demand is coming from exchange-traded funds (ETFs). Inflows to gold ETFs reached a seven-year high in the first quarter. The last time investor interest in gold hit these levels was at the tail end of the global financial crisis and recession in 2009.
What factors are driving the demand for gold and creating favorable conditions for the gold bull market to continue?
The lingering uncertainty of Brexit: It is hard to say with any certainty how the United Kingdom and the European Union will fare in a post-Brexit world. Most economists have said leaving the EU will likely cause a slowdown in the UK economy over the short term. Only the severity of the looming recession is up for debate.
But the long-term consequences of the UK vote to leave the EU will be sorted out over the next few years. Much will depend on Britains ability to negotiate with its EU partners as the Brexit process continues. Thats leaving many investors with a sense of trepidation about investing in global markets.
Gold has benefited from ongoing currency fluctuations in the wake of Brexit. Many analysts in the foreign-exchange markets believe those swings will continue. That gives gold the potential to ride these favorable waves for some time to come.
Unrest on the global stage: Last months Brexit surprise was the headline event that bumped up gold prices. But other recent global events also played a part, including terror attacks in Orlando, Fla., and Nice, France, and a failed coup in Turkey (a major player in the gold market).
Global turmoil and threats of terrorism heighten investor concerns about the future. The increased perception of danger and uncertainty drives a flight to safety away from currency and equity markets and into the relative safe harbor of gold.
In light of recent events, it seems these extreme acts of violence will become part of the new norm. These heightened risks to security will continue to draw investors to gold.
Lack of confidence in global central banks: The Federal Reserve played a major role in rescuing the U.S. economy during the 2008 financial crisis. But saving the day came at a heavy cost: Bond yields fell to historically low levels, bond-market risk increased with the run-up in prices, and fixed-income investors found few options for cash flow at a positive real rate of return.
Now, global central banks are following the Feds playbook for jump-starting their own sluggish economies. The European Central Bank and the Bank of Japan are doing brisk business in the bond market. As a consequence, yields in global bond markets are falling too.
Rates for 10-year German and Japanese government bond are negative. So are yields on 30-year Swiss government bonds.
These negative-interest-rate policies at global central banks havent had their intended effect yet. Meanwhile, global investors are running out of options for growth, so gold may keep its shiny luster while these central banks continue to fight their uphill battles.
The time remains right for gold.
Market momentum is with gold investors right now. The conditions that make gold attractive as an asset class slowing economic growth and geopolitical uncertainty are likely to be with us for the next few months, if not the next few years.
The recent price surge shouldnt deter investors from considering an increase or addition to their gold allocation. Theres still room for the gold bull market to run.