Why Gold Prices Suddenly Hit an All-Time High

European Fiscal Instability, Led by France, Is the Primary Factor
Concerns Over U.S. Economic Slowdown and Capital Inflows via Gold ETFs Also Play a Role
Fed Independence at Risk → Inflation → Higher Gold Prices
"Even More Reasons to Hold Gold for the Long Term"

The price of gold, which had been moving within the range of $3,200 to $3,500 per ounce for about four months, recently surpassed $3,600, setting a new all-time high. On September 5, LS Securities analyzed the recent surge in gold prices in its report titled "Gold: Reflecting the European Fiscal Crisis, Record-High Rally."

Reason 1 for the Rise in Gold Prices: French Fiscal Crisis

The primary factor is the rise in government bond yields due to fiscal instability in Europe, particularly centered on France. There was also a short-term increase in gold prices during the 2011 eurozone (20 countries using the euro) fiscal crisis. However, Hong Sungki, an analyst at LS Securities, pointed out, "At first glance, it may seem natural that major countries' fiscal crises drive up gold prices, but past cases show different patterns."

The 2022 bond market turmoil in Italy and the United Kingdom is a representative example. After the resignation of Italian Prime Minister Mario Draghi in July 2022, the market was deeply concerned about Giorgia Meloni, who won the September general election, due to her Eurosceptic stance and perceived fascist tendencies. As a result, Italy's 10-year government bond yield soared by 180 basis points (1bp = 0.01 percentage points) over two months. Around the same time, the United Kingdom also saw its 10-year government bond yield jump by 260 basis points over two months following Prime Minister Liz Truss's announcement of tax cuts. However, during the same period, gold prices actually declined and did not respond to the fiscal crises.

Reason 2 for the Rise in Gold Prices: Capital Inflows via Gold ETFs

In addition to concerns over the European fiscal crisis, various economic indicators showing instability appear to have been reflected in gold prices. There is an interpretation that worries about an economic slowdown due to deteriorating U.S. employment data, as well as inflation concerns stemming from tariff impositions, have been factored into gold prices. Furthermore, as expectations for U.S. interest rate cuts became more visible, capital inflows through gold exchange-traded funds (ETFs) also served as a driving force behind the rise in gold prices.

With capital and interest rate factors being reflected, the regression value from the gold price prediction model has, for the first time since the end of last year, exceeded the actual value. Theoretically, this indicates an undervalued phase. However, the recent increase in gold prices is resolving this undervaluation.

"Uncertainties Everywhere... Gold Should Be Held for the Long Term"

LS Securities expects that the short-term additional upward momentum from the European fiscal crisis will not be significant. However, political instability in countries around the world remains a problem. For instance, the upcoming confidence vote for the French prime minister next week could trigger instability in the financial markets.

Another risk is former U.S. President Donald Trump’s attempts to change the composition of the Federal Reserve Board, the central bank of the United States. In the early 1970s, President Richard Nixon pressured then-Fed Chairman Arthur Burns to implement excessively expansionary monetary policy, which ultimately led to two episodes of stagflation in the 1970s. The threat to the Fed’s independence is expected to entrench high inflation, which in turn would drive gold prices higher.

Analyst Hong stated, "Since the COVID-19 period, the diversification effect between bonds and stocks in the asset market has almost disappeared. In an environment of inflation caused by supply shocks and institutional trust crises, this increases the importance of gold within an asset portfolio," adding, "There are now even more reasons to hold gold for the long term."