When it comes to investing, gold may be the antithesis of artificial intelligence (AI). The precious metal has served as a store of value for thousands of years with zero technological innovation — gold is discovered, not developed. Gold is also a tangible asset and can act as a potential hedge against inflation or a safe haven during times of crisis. Given these properties, and against the backdrop of a risk-on, record-setting equity market, many investors are wondering what’s behind the paradoxical price action of gold’s rally to new highs and how the yellow metal has matched the momentum in AI stocks over the past several months (both gold and the equal-weight Magnificent Seven Index are up around 20% since March). Here, we discuss the key drivers of gold and why this rally is no flash in the pan.

After consolidating sideways for several years, spot gold prices finally reached record highs in March. The rally continued into the summer months as expectations for a monetary policy pivot from the Federal Reserve (Fed) grew stronger. Interest rates and the dollar subsequently declined as the market began to price in higher probabilities of rate cuts. This was the expected response from gold, as lower U.S. interest rates and a weaker dollar increased the appeal of non-yielding bullion. Perhaps more surprising is the lack of demand for gold exchange-traded funds (ETFs). Until recently, ETF holdings of gold had inexplicably decoupled from the precious metal over the past two years. However, with gold breaking out to new highs and attracting a lot of headlines, fear of missing out seems to be kicking in. Buyers have returned to chase this rally, with gold ETF holdings recently reporting seven straight weeks of positive inflows, marking the longest inflow streak since March 2022. History suggests this trend could continue, as peaks in gold ETF holdings tend to occur after peaks in gold prices.

A weaker dollar and declining interest rates have played key roles in gold’s rally to record highs. However, in recent years, central banks have increasingly played a supporting role. According to the World Gold Council, global central banks purchased record levels of gold in 2022, followed by near-record buying in 2023. More recently, global central banks bought 183 tons of gold in the second quarter, marking a 6% increase compared to last year. Rising demand has been driven by foreign central banks diversifying away from dollar reserves, partly due to concerns over escalating U.S. deficits, and perhaps more significantly, concerns over the potential seizure of reserve assets by the U.S. government, as Russia experienced after its 2022 invasion of Ukraine.

Gold has climbed to new highs amid broad-based demand, falling yields, a weaker dollar, and elevated geopolitical risks. Momentum could continue, as gold has historically posted strong six-month returns after rate-cutting cycles begin. LPL’s Strategic and Tactical Asset Allocation Committee (STAAC) maintains a positive outlook on precious metals.

A final thought on the stock market: Last week’s headliner was Jerome Powell and the Federal Reserve (Fed) cutting rates by half a percent on Wednesday, September 18, for the first time since the COVID-19 pandemic broke out in 2020. The Fed “pause” ended at 423 days and now stands as the second-longest on record, while the 26% gain for the S&P 500 during the pause (7/27/23–9/18/24) ranks first. Historically, stocks have performed well after rate cuts if a recession is avoided. However, this is a peculiar Presidential election year, as the incumbent withdrew, and current polls suggest a close race. This makes historical election data and stock market predictions less reliable. LPL suggests that volatility may increase as the election nears, and that the stock market sometimes becomes rocky at this time of year. No changes are being recommended by LPL to their neutral equity stance, but they are raising awareness with historical information.

Reno is experiencing beautiful fall weather — we hope yours is great wherever you are!

Mark and Elise

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. All investing involves risk including loss of principal. No strategy assures success or protects against loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk. The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful. All information is believed to be from reliable sources; however, LPL makes no representation as to its completeness or accuracy. This research material has been prepared by LPL Financial LLC. Tracking #6398087-1 (Exp. 10/25).