Do you think the price of gold can't possibly go any higher this year? Think again. Gold is having a banner year. The price of the yellow metal is up 39% year to date. And it seems to be picking up momentum -- it soared 8% over the past month. What's driving the ascent?
Several factors, in fact. First, gold is a traditional safe haven that investors flock to in times of stress. Now is one of those times. Concerns about geopolitical tensions, stubbornly high inflation, and tariff-induced chaos in the global trading system are growing -- and are pushing investors to the safety of gold.
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Probably more important right now, however, is central bank hoarding. Central banks and other government institutions around the globe are in the midst of a gold accumulation run as they seek to diversify their holdings away from dollar-denominated assets. The trend began in 2022 after Russia invaded Ukraine and the U.S. reacted by freezing Russia's foreign exchange reserves.
Central banks and other sovereign institutions have purchased more than 1,000 tons of gold each year for the past three years. It seems that they have no plans to halt or slow their shopping spree. A recent survey by the World Gold Council found that 43% of central banks said they would continue to increase their gold reserves, and 95% believed that overall gold reserves will continue to rise over the next 12 months.
In fact, in June of this year, gold overtook the euro as the second-largest asset in central banks' reserves, at 20%. The euro accounts for 16% of global reserves and the U.S. dollar about 46%, while other currencies account for the rest.
A record high
The price of gold is currently at a record high, but it's likely to push even higher. The above factors look poised to continue, and one more very significant factor is about to come online. The Federal Reserve's rate setting committee looks highly likely to begin cutting interest rates again at its meeting next week.
In fact, futures traders put the chances of a quarter-point cut at about 92%, and chances of a half-point cut at 8%. When the Fed cuts interest rates, it weakens the dollar and makes gold -- which is priced in dollars -- cheaper for international buyers. That drives demand -- and the price of gold -- higher still.
So, what should a smart investor, who thinks -- as I do -- that there is significant upside to the price of gold this year do?
A golden ETF
One way to play the rising gold price, without concentrating money on a single gold mining stock, is the MSCI Global Gold Miners ETF (RING +2.86%).
NASDAQ: RING
Key Data Points
The ETF has about $2 billion in assets under management. It holds 42 gold-related stocks. Here are the top four holdings and their approximate weights in the fund:
- Newmont (NEM +8.68%), 15%
- Agnico Eagle Mines (AEM +0.55%), 14%
- Barrick Mining (ABX +1.96%), 8%
- Wheaton Precious Metals (WPM 1.49%), 7%
None of the other 28 stocks in the ETF account for more than 5%, which makes it highly diversified. The fund has more than doubled in price this year (it's currently up 105%). Its expense ratio, which is paid annually by investors, is 0.39%. That's considered about average for a fund like this.
Gold is currently at about $3,675 an ounce. Further diversification away from the dollar could push that much higher. Investment bank Goldman Sachs estimates that the price of gold could hit $5,000 an ounce if global investors believe the Federal Reserve's independence is undermined, which is now a very real threat.
If that happens, you'll absolutely want to have some gold in your portfolio.
