It all began in ancient Sumeria…

Gold has hit another record high, charging through $US4000 for the first time in history. There are a lot of stories that people tell to explain the movements in gold. The simplest one is that it’s a risk-barometer that goes up when people are fearful. That’s sometimes – but rarely – the case. In the bigger picture, it’s a symptom, for better or worse, of a debt based monetary system. But presently, gold is a five factor trade:

1. Expectations of future US interest rate cuts
2. Threats to US Fed independence
3. Geopolitical risks around the world
4. US trade policy and tariffs
5. Government fiscal policy and rising debt

All of these are currently bullish drivers of gold. However, a couple stand-out as being the primary drivers of the recent rally, beginning after the commodity broke resistance at its previous all time high at approximately $US3500 per ounce.

(Source: Trading View)
Past performance is not a reliable indicator of future results.

First: expectations of aggressive interest rate cuts from the US Federal Reserve, which the markets are implying will take the Federal Funds Rate to or below 3% next year. Compounding that is the threat to Fed independence posed by the Trump administration and the potential that the board will be stacked policy doves.

(Source: CME Group, Capital.com)

Second: what might be described as the “run it hot trade”. The rally in gold this week was set off by the Liberal Democratic Party leadership election, which resulted in the victory of deficit-dove Sanae Takaichi. She has advocated for big public spending on strategically important industries as well as tax cuts and hand outs for households. It contributes to a trend of governments around the world – partly due to political economy, mostly due to strategic reasons – running expansionary fiscal policy and running up debt, despite above target inflation.

(Source: Capital.com)

The important nuance here threading these two drivers together are central banks seemingly willing to tolerate above target inflation. That’s primarily out of a desire to safeguard labour markets.

There’s more to gold’s rise than just this. Geopolitical risk, US trade policy, de-Dollarisation.  There’s also reason to believe gold is due a pullback. The intense interest and media focus on the commodity may be a contrarian indicator. However, in the bigger picture, the five factors driving gold remain significant tailwinds. For as they persist, gold may continue to trend higher.