Is Gold Overpriced Or Can Its Price Go Even Higher?

Authored by Claudio Grass via The Mises Institute,

This question has been at the center of a great many conversations I’ve been recently having with clients and friends. The way I like to answer it is with another question: Expensive compared to what?

Despite its recent surge to record highs, there are compelling reasons why purchasing gold right now is a prudent decision, with strong indications that its value is poised to climb even higher. Making investment decisions solely based on the current price of any asset without considering its underlying value or future potential can be prove to be a very costly mistake.

For one thing, it is obvious that there is a reason why gold has skyrocketed to these new levels. Actually, there are many reasons, and all of them are bound to become increasingly important and clear to more and more people in the months and years to come. For example, it is (or it should be) by now blatantly clear to every thinking person that inflation is not under control. Prices in the real economy, as opposed to the cherry-picked and extremely unrepresentative CPI metrics, have been steadily climbing and pushing countless households to the brink.

This is only going to get worse, as central banks around the world have already paved the way for a policy U-turn and the return to expansive monetary policies, including quantitative easing and near-zero interest rates, in order to stimulate economic growth, or the illusion of it (a very useful ploy in a global election year like 2024). These measures invariably lead to further fiat currency devaluation and erosion of purchasing power. This in turn is also very helpful when it comes to the unsustainable debt burden that most advanced economies are saddled with - another great boost during election season. Gold, on the other hand, maintains its intrinsic value over time, making it an attractive alternative to fiat currencies.

Central banks themselves obviously understand the implications of their own policies better than the average investor and that’s why they have always increased their gold reserves in times of turmoil and in times of loose money. In the early days of the pandemic, and then again after Russia’s invasion of Ukraine, global central banks continued to add to their gold holdings while ETF investors were selling off theirs. Now, once again, we’re seeing a strong trend of ETF outflows. February marked the ninth month in a row, but the price has still been climbing.

As Simon White, Bloomberg macro strategist, highlighted: “Over the last six months, China, Germany and Turkey have increased their gold holdings by the most (these are official holdings - when it comes to China, its true holdings are likely much higher than stated). Central banks want gold as it is a hard asset, not part of the financialized system when owned outright. But the dominant reason is a desire to diversify away from the dollar. If you’re not on friendly terms with the US, then it is a way to avoid your reserve assets being seized, as happened to Russia.”

This last point gives us a glimpse of a much bigger picture that investors need to bear in mind: Geopolitics.

It’s hard to think of another time in our post-cold-war history that the world has been so bitterly and so dangerously divided. The way the West responded to the Russian invasion of its neighbor, by weaponizing the US dollar and the entire banking system, has caused a lot of countries to think twice about how to safeguard their own assets. The obvious answer is gold, and that is what is behind this monumental transfer of real wealth we’re now seeing from the West to the East. In February, China’s central bank added gold to its reserves for a 16th straight month and it shows no signs of stopping its buying spree, as it is clearly on a mission to diversify its holdings and reduce its dependence on the US dollar.

And it’s not just the Chinese central bank that’s buying. According to the Financial Times, “in recent months, the precious metal has gained a second wind from what analysts describe as “phenomenal” purchases by Chinese consumers seeking a safe place to park their cash after local property and stock markets tumbled.” As ING analysts confirmed in a note, "We expect gold prices to trade higher this year as safe-haven demand continues to be supportive amid geopolitical uncertainty with the ongoing wars and the upcoming U.S. election.”

This is clearly a long-term shift in the gold market and the dynamics behind it have the potential to support much higher prices than what we’re currently seeing. This is precisely why investors need to look at the bigger picture and consider the current levels in their proper content and time horizon.

In other words: Sure, gold might seem expensive today, but today’s price is very likely to seem like a bargain in the not so distant future.