Aussies have been flocking to buy gold but they’re being warned about what a rising price means for the world long-term. (Source: Reddit/Getty)
Gold is one of the hottest commodities at the moment as its price continues to reach record highs. ABC Bullion, Australia’s leading precious metals provider, has seen queues of people down the street outside its Sydney store this week as people try to snap up their physical slice of gold before it gets more expensive.
In Australia, the spot price per troy ounce peaked this week at $6,142 (USD$4,035). This time last year, the price was at $3,940, meaning you could be heading towards doubling your money if you hopped on the bandwagon before it started its bullish run.
Financial adviser Hamish Landreth told Yahoo Finance there’s usually an unfortunate downside to making it big with gold, however.
“Gold goes up when there’s fear and concern, or dropping interest rates,” the director of financial services at Prosperity Advisers Group said.
“The irony is, for people to make a profit off their gold position, not only do they have to get in before the price rises, they also have to get out following some sort of global event that’s caused that price to move up.”
If everyday investors want that price to keep going up, they might have to get comfortable with the world continuing to be a little unstable.
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There are plenty of factors that influence the price of gold, but there are two common things that can influence it.
When the US Federal Reserve drops the official cash rate, gold typically goes up. Gold expert Justin Lin from Global X, one of the largest gold fund managers in Australia, told Yahoo Finance this is because when interest rates fall, treasury bond yields weaken and people flock to the rare metal instead.
The other aspect is global uncertainty and turmoil because gold is viewed as a safe haven when times get rough.
Donald Trump’s Liberation Day tariffs sparked stock market crashes around the world and the gold price surged directly following the market turbulence.
More recently, the US government shut down and there has been ongoing war in the Middle East. Lin said because the gold price is tied to the US dollar, any major moves from America can cause it to fluctuate.
But he added that there have also been huge structural changes in recent years that have affected the way gold is viewed by other global players.
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“Chinese gold ETFs were basically non-existent prior to 2019 because this concept of investing in gold by ETFs, or investing in gold outside of jewellery was just something that didn’t occur to them,” he said.
“But then you had property markets crash and they had a very limited investment catalog over the past two to three years. So they started thinking, ‘Hey, maybe we can invest in gold’.
“So that’s a completely new investor base.”
Lin said central banks have also been bulk buying gold to diversify their reserves and move away from a “lackadaisical” reliance on the US dollar.
He suggested the rally in the gold price in the last few weeks is likely tied to Western investors now joining the fray, with many everyday buyers snapping up the metal due to a fear of missing out.
It might be tempting to jump on the bandwagon, but Landreth said investors should walk, not run.
“The word of caution is to not follow the herd and stick to the tried and true principles of diversification, and not getting caught up in the latest hysteria,” he said.
“Gold is not an income-producing asset like property or shares or cash products. The price and the potential for return is purely a function of supply and demand. There is arguably no intrinsic value in gold other than what someone else is willing to pay for it.
He said it’s also not a given that the price will continue its upward trajectory.
“If people are running to gold now as a way to protect against future volatility, you could argue that that’s already baked into the price,” he said.
Hamish Landreth and Justin Lin said the gold rush has been influenced by a variety of factors in recent weeks. (Source: Supplied)
“The risk is that if the global economy effects don’t play out to the extent that the media is speculating, that could also see downward pressure on gold with people exiting out.”
Lin suggested the gold price could soar to USD$4,500 ($6,848) per troy ounce by mid-next year, and that could be influenced by what happens between now and then on the world stage.
If you ask one of the world’s biggest investment bankers, Jamie Dimon, who is the veteran CEO of JPMorgan Chase, the world’s largest bank by market cap, it’s not looking pretty.
He’s concerned about the possibility of an upcoming stock market correction in the next six to 24 months. A correction is different to a crash, and is typically defined as drop of more than 10 per cent in the value of a stock index.
“The level of uncertainty should be higher in most people’s minds than what I would call normal,” he said.
Landreth said there are plenty of ways to get in on the action:
You can buy physical gold bars from places like The Perth Mint or ABC Bullion
You can invest into a company that holds and stores gold
You can buy gold ETFs
You can invest in companies that derive the majority of their profits from gold, so gold mining companies or gold distribution companies
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