Gold Prices Have Surged. 3 Reasons There Are More Gains to Come.

Gold has been surging—and there are likely more gains to come. (DAVID GRAY/AFP via Getty Images)

Key Points

About This Summary

• Gold futures have more than doubled in three years, surpassing the S&P 500’s 71% gain, driven by inflation and market volatility.
• Central banks’ increasing gold purchases since 2022, spurred by geopolitical events, signal a continued demand for safe assets.
• Analysts anticipate commodity fund managers will increase gold allocations, potentially driving prices to $4,000 by next year.

The price of gold has surged, but there’s no need to sell. It’s an important asset to own today.

Gold futures are up 121% over the past three years, outpacing the S&P 500’s 71% gain in that time. Higher inflation in a post-Covid world and periods of stock market volatility have underpinned the rally, making gold both a store of value and haven.

It might look tempting to sell, given the run and the fact that the stars seem to be aligning for more stock gains, but there’s a strong case for holding on to gold—or even buying more of it.

First off, the gains aren’t particularly large given the commodity’s history. While the precious metal has gained 43% over the past year, the typical surge when gold takes off has been 57% going back to 1975, according to DataTrek analysts.

“We continue to like gold, even after its recent large gains, since the current investment environment remains conducive to more upside,” write DataTrek analysts who cite the various factors increasing central bank demand for gold.

Second, central banks are likely to continue to be willing buyers. Central banks began increasing their purchases in 2022, when the Russia-Ukraine war began. At the time, the U.S. and its allies froze Russia’s central bank dollar holdings, convincing central banks that they’d need alternative safe assets to U.S. Treasuries and the dollar. The wholesale changes to economic policy and government spending the Trump administration has initiated make that only more necessary.

Third, commodity fund managers could allocate more to the precious metal. Right now, the average portfolio allocation to gold in Bank of America’s fund manager survey is 2.4%. More than a third of those surveyed said their funds hold almost no gold, while those who do own it, have 4.2% of their funds in gold. Bank of America strategists expect more mangers to allocate a lot of money to it in the months ahead.

The fact that traders look positioned to buy more is partly why Deutsche Bank precious metals analyst, Michael Hsueh, sees gold hitting 4,000 by next year, for an 8% gain from a current 3700. Sure, that is a smaller gain than that seen in the past few years, but it’s still strong given the potential risk to the stock market from a slowing economy.

Gold’s rally has also been well supported. It has consistently seen buyers come in over the past few years to support the price at its 200-day moving average, currently at $3,140. Any minor dips are likely to see buyers return.

Despite the rally, expect gold to continue to shine.

Write to Jacob Sonenshine at jacob.sonenshine@barrons.com