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The recent gold rally is counter-intuitive, as high interest rates typically make gold bullion less attractive.
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But billionaire investor David Einhorn has a theory, which he shared in his latest letter to investors.
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Einhorn points out that the rise in gold may be due to countries in the East buying gold from Western nations.
Gold has had a record year so far in 2024.
However, the commodity’s sudden rise could be surprising. That’s because the macroeconomic environment should actually be creating a headwind to the gold price rise, as the Federal Reserve’s interest rate makes other investments such as bonds and savings accounts more attractive in the longer term compared to the metal as it does not provide a yielding asset.
To explain the sharp rise in gold prices, billionaire investor David Einhorn offered a possible theory in his latest letter to investors published this week.
“Although it is possible that the progress is related to the market beginning to doubt the sustainability and wisdom of both monetary and fiscal policies, other signs suggest that this was not the case,” Einhorn said in the letter.
Instead, the Greenlight Capital founder said there was a “secular trend” of countries in the East buying gold from Western nations.
“Perhaps the West is running out of gold it wants to sell, while demand from the East has remained strong enough to drive up the price,” he said in the statement.
According to data from the World Gold Council, central banks around the world have purchased over 1,000 tonnes of gold for the past two years in a row – and one of the biggest buyers is China.
The world’s second-largest economy has been suffering for years from a sluggish economy, an ailing real estate sector, a weak stock market and a persistently high unemployment rate. This has led the central bank and consumers to hoard precious metals as a stable store of value, providing the People’s Bank of China a way to diversify its reserves away from the dollar.
For 17 months, the PBOC gobbled up gold, increasing its holdings by 16% during that time.
The World Gold Council reveals that India and Singapore have also been scooping up gold to hedge against global economic turmoil.
Rising demand for gold is driving its prices higher, and economists expect the rally to skyrocket further as geopolitical uncertainties and macroeconomic hurdles like inflation fuel further gains.
Top economist David Rosenberg predicts a further 15% rise in the yellow metal’s price, eyeing a potential 30% rise as central banks consider interest rate cuts. However, he stressed that gold can rise regardless of a soft landing in the economy or a deeper recession.
Market guru Ed Yardeni, meanwhile, predicts gold prices could rise to $3,500 by next year, suggesting a potential upside of 50%. He draws parallels to the era of great inflation in the 1970s and suggests that current inflation trends could push gold to new heights.
Others, like billionaire investor Ray Dalio, say gold can hedge risks stemming from high levels of government debt. In a recent post, he said he owned gold because the risk of a debt or inflation crisis was increasing.
Read the original article on Business Insider