Gold just set a record. Why?

SPEAKER_1 (0:01)

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Ethan Wu (0:36)

Thank Pushkin.

Leprechauns across the world were delighted on Friday as gold, the shiny metal we all love, hit an all-time high, $2,152.30 per troy ounce. It's a bit of a surprise for us in the markets-watching world. Canonically, you'd think, in a high-rates world, we should see lower gold prices. But no, gold has done just the opposite. Today on the show, we ask, why? This is Unhedged, the markets and finance show from the Financial Times and Pushkin. I'm reporter Ethan Wu here in the New York studio, joined today by the leprechaun at the end of the rainbow, Robert.

I think we're going with that. Alright, Rob, we've had you on to discuss the medal of your dreams. And like I mentioned, it is weird that we're seeing gold at all time highs, right? I mean, the first thing you learn when you read about gold as an investment asset, right, is that gold really cares about interest rates, specifically the real rate. And, you know, I think one way you can frame it is in terms of opportunity cost.

SPEAKER_3 (1:55)

Correct. So the real rate is the amount of money inflation adjusted.

You know, you can just get risk free in the market and gold just sits there. Gold doesn't produce any yield whatsoever. So if the opportunity cost of just the rate you can earn on money rises, what you're willing to pay for this stuff that really, other than a little bit of industrial use and for making jewelry, just sits there, that price is going to go down. But this is all very humiliating, right? Because we've been taught that this relationship was one of the most stable relationships in all of finance. Real rates up, gold price down.

And when you have jobs like our jobs, you say these sort of things again and again, and you feel very intelligent. And then you have a period like the last year or so when it just doesn't work.

Ethan Wu (2:48)

Yeah, absolutely.

SPEAKER_3 (2:50)

So it's very unsettling.

Ethan Wu (2:51)

Yeah. The past couple of years have been a bit of a roller coaster for gold. They hit a high in 2020 and then have kind of traded sideways up and down. But now we've broken the all-time high and it's worth, I think, asking why.

And, you know, on this count of real rates, right, there is a story that can be told in gold's favor, which is that even though real rates are high, generally speaking, interest rates are high in general, probably the highest they've been since 2008, they have fallen recently. As we talked about in the show with Rob and with Katie Martin, rates are down a bit. People are looking at the US Central Bank, seeing them talking about pausing and maybe considering cuts at some point in the future.

SPEAKER_3 (3:33)

So maybe the gold price is kind of anticipating in some way further declines in rates.

Ethan Wu (3:38)

Exactly. Just like much of the market, right? It appears that all kinds of risk assets, stocks, bonds, whatever, are looking at the Fed and saying, hey, rates might come down soon. Also, the economy appears to be slowing a bit, and that should kind of drag down real rates as well. So that's been one thing moving in gold's favor. And another big thing is the dollar, right?

The majority buyers of gold, not the US, it's not the Europeans, it's the emerging markets.

SPEAKER_3 (4:06)

But gold is priced in dollars, right? Exactly, so people who don't have dollars wanna buy gold, they gotta buy dollars, as it were, right? And so a weak dollar helps the gold price.

Ethan Wu (4:18)

If you're a gold buyer in Kazakhstan, India, Nigeria, the dollar weakens, you have more purchasing power when it comes to buying gold. Now, to be clear, there are other offshore non-US dollar gold markets, but they're a lot smaller than the main one in London, which is all priced in dollars.

SPEAKER_3 (4:35)

So weak dollar helps, falling rates recently helps, despite the high rate levels overall. What's next?

Ethan Wu (4:43)

Well, then there's the kind of the classic, and this maybe sounds like a little bit of gold buggery, but geopolitical risk. People seem to like buying gold when things get a little hairy in the world. We talk about it on the show, whenever there's a war breaking out, it's part of the safe haven trade. It's part of the, oh, I don't know what's going on in the world, let me just buy gold, right?