The price of gold continues to climb, reaching higher peaks and setting records. The cost of the precious metal is benefitting from a perfect storm. Instability is driving investors toward the tried and trusted commodity. The spectre of economic downturn is putting a dampener on some stocks and central banks worldwide are on a gold-buying spree. Although gold is sometimes considered a low-risk low-return investment, this year it has outperformed the S&P 500. So have gold prices run out of road, or is now a good time to invest?

How well is gold performing?

As of September 23, 2024, gold was 27.1 per cent up year to date, compared to just 20.8 per cent for the S&P 500, as per data from Forbes. The outlet reports this means gold is on course for its highest returns in over a decade as its price looks set to be driven even higher by the Fed’s recent rate cuts.

Over the last ten years, the Dow Jones increased in value by 147 per cent, compared to 116 per cent for gold. But in the past five years, gold is up 76 per cent, compared to the Dow’s 56 per cent. This isn’t altogether surprising, because historical trends show gold and stock markets tend to behave as mirror images of one another.

Typically, when the economy is booming and stocks surge, investors tend to place their money in profitable businesses. When the economic situation is less rosy, demand for gold rises, as investors consider it a safe haven for their cash.

But that isn’t to say the stock market isn’t performing well, the Dow and S&P 500 recently hit record highs of their own. The question for those who haven’t yet invested in gold – or are considering buying more, is whether this trend will hold.

With conflict in the Middle East looking as though it may enter a new phase of escalation, and no signs the war in Ukraine is coming to an end anytime soon – some observers think gold prices could continue to increase as the geopolitical situation becomes even more unstable.

Will gold prices go even higher?

Although past trends can be useful to help guide our decision-making process, they aren’t predictors of future trends. While some observers are bullish on gold’s run, others are more cautious. Among the doveish crowd is Tom Stevenson, of Fidelity International, who wrote in The Telegraph:

“I’m a sceptical bull. I do have some exposure to gold myself, and I’m glad I have over the past couple of years. But if someone were to ask me today whether they should too, I would struggle to answer them.”

However, some forecasts suggest there is reason for continuing optimism. In a recent report, Goldman Sachs forecast the price of gold would reach $2700 by early 2025. Commenting on the analysis, they said:

“In this softer cyclical environment, gold stands out as the commodity where we have the highest confidence in near-term upside,”

A report by ING, published just before the Fed’s recent rate cut, also put gold’s price point at $2700 next year. In a September 9 forecast, they said:

“We believe that the long-awaited Fed rate cut will drive gold to new highs. The US presidential election in November will also continue to add to gold’s upward momentum through to the end of the year, in our view.

 “Geopolitics will also remain one of the key factors driving gold prices. The war in Ukraine and the Middle East and tensions between the US and China suggest that safe-haven demand will continue to support gold prices in the short to medium term. Central banks are also expected to keep adding to their holdings, which should offer support.

“We now see gold averaging $2,580 in the fourth quarter, resulting in an annual average of $2,388. Gold’s upward momentum will continue next year with 2025 prices averaging $2,700.”

And in a recent note, one Bank of America strategist suggested that the activity sparked by the Fed’s rate cut could pop – and that investing in gold and bonds could be a smart hedge. As per Bloomberg:

“The strategist also said stocks outside the US and commodities were a good way to play a possible soft economic landing, with the latter being an inflation hedge. International equities are cheaper and starting to outperform US peers, Hartnett said.”

Is gold a good investment?

While we can’t say with certainty that gold will continue to rise in price, the analyst’s consensus is that it still shows promise, and there could be a real opportunity to be taken. Before you make any investment decision you should always consider taking professional financial advice.

But outside of the particulars of the current market, there is a historical and ongoing logic behind gold’s value that goes beyond flashy jewellery. Since ancient times, gold has been regarded as a valuable investment.

One key reason is its status as a store of value. Unlike paper currencies, which can lose value due to inflation or economic instability, gold tends to retain its purchasing power over time. It is not subject to the same risks as fiat currencies, making it an attractive option during economic downturns or when inflation is high.

During times of geopolitical uncertainty, financial crises, or market volatility, investors often flock to gold because it tends to maintain or increase in value when other assets decline. This makes gold a reliable hedge against risk, providing a sense of security in turbulent times.

Gold is also considered to be a diversification tool. Including gold in a portfolio helps spread risk because it has a low correlation with other financial assets like stocks or bonds. This means that when stocks are falling, gold may not follow the same trend, and could even increase in value, balancing potential losses from other investments. So whatever gold’s near-term fortunes, its value as a solid pillar of any portfolio is here to stay for the long-term.