Gold is changing hands at record highs, spelling good news for Australian gold stocks, but AMP Ltd (ASX: AMP) chief economist Dr Shane Oliver believes there's more upside yet to come.
The gold price has added slightly more than 42% in value over the past year, with an ounce of gold now selling for US$3685.56 per ounce, up from US$2590.84 a year ago.
The price of the precious metal keeps testing record highs, but Dr Oliver says while there is some reason for caution, the fundamentals support further gains.
Dr Oliver said that after slumping into the 2000s, central bank holdings of gold have been rising, with the trend accelerating since the start of the Ukraine War, "as some are seeking to diversify away from the US".
Second, central bank rate cuts since 2023 are lowering the opportunity cost of holding gold. Expectations for a resumption of Fed rate cuts are adding to this. Low interest rates mean the missed income from holding a non-income producing asset like gold is low. Third, the resumption of the downtrend in the $US in place since 2022 has also helped boost the gold price as gold is priced in $US.
Dr Oliver said that gold was also seen as a hedge against geopolitical uncertainty, which has been on the rise, and could also be bought as a hedge against another wave of inflation.
Dr Oliver added finally: "Gold demand is up as a hedge against governments seeking to boost inflation and hence lower the real value of their currencies to ease public debt burdens. Concerns have been rising given unsustainable budget deficits and debt levels in the US, the UK, Japan, and France''.
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Where to from here?
Dr Oliver said in the near term, the risk of a correction in the gold price was high, as it was technically overbought and due for a pullback.
However, the medium-term picture remains positive for gold. Global interest rates look set to fall further keeping the opportunity cost of holding gold down. The US dollar is likely to fall further. Deglobalisation, bigger more interventionist government (particularly under Trump) and the falling ratio of workers to retirees makes the world more inflation prone than it used to be. At some point there is a risk of a more severe public debt crisis, and geopolitical tensions are on the rise – albeit timing either will be hard. So, demand for gold is likely to remain strong.
Shares in ASX-listed gold producers have performed well this year to date, with Evolution Mining Limited (ASX: EVN) stock up 94.3%, Ramelius Resources Limited (ASX: RMS) shares up 70.8%, Regis Resources Limited (ASX: RRL) shares up 118.4%, and Genesis Minerals Limited (ASX: GMD) shares up 128.8%.
