Gold's new all-time high: Evaluating the asset’s long-term outlook

Gold prices (XAU/USD) surged past the $2,700 mark, reaching a new all-time high during Friday’s Asian session. The precious metal has maintained a strong uptrend over the past week, driven by a combination of central bank monetary easing, geopolitical risks, and a weakening U.S. Dollar. As global uncertainties persist, gold continues to shine as a safe-haven asset, attracting investor interest across markets.

Monetary easing and geopolitical risk offer support

Gold’s rally is largely driven by aggressive monetary easing from central banks, which have cut interest rates to combat slowing global growth. This low-rate environment favours gold, as it becomes more attractive compared to interest-bearing assets. The Federal Reserve, European Central Bank, and others have already reduced rates multiple times this year, with more cuts expected.

Geopolitical tensions, particularly conflicts in the Middle East, have also fueled demand for gold as a safe-haven asset. Additionally, uncertainty surrounding the closely contested U.S. Presidential election is further boosting gold’s appeal amid expectations of market volatility.

US dollar weakness boosts Gold

Another factor boosting gold prices is the recent pullback in the U.S. Dollar (USD). The greenback reached its highest level since August earlier this week but has since retreated, offering additional tailwinds for gold. A weaker USD makes gold, which is priced in dollars, more affordable for holders of other currencies, spurring increased demand.

However, despite the USD’s decline, market participants no longer expect another outsized interest rate cut from the Federal Reserve in November. This tempered outlook on rate cuts has led to a rise in U.S. Treasury bond yields, which could limit the extent of the USD’s downside and potentially slow further gains in gold.

A new model for Gold’s long-term returns

While gold’s safe-haven status is well-known, its contribution to portfolio returns has been harder to quantify. A recent World Gold Council (WGC) study challenges traditional models that understated gold’s value by using outdated assumptions, like focusing on the Gold Standard era and ignoring non-financial demand.

Earlier models estimated gold’s long-run returns at 0% to 1%, based on its role as a store of value tied to inflation (CPI). However, the WGC study shows that gold’s long-term returns are closely linked to global GDP growth, far exceeding inflation over the last 50 years.

To capture this, the WGC introduced the Gold Long-Term Expected Returns (GLTER) model, which includes both financial and economic factors. The model finds that gold’s returns are mainly driven by global GDP growth, with some influence from portfolio growth (stocks and bonds).

Regression analysis, showing Gold is influenced by GDP and the global portfolio in the long run

Source: World Gold Council

The WGC expects gold’s average annual return over the next 15 years to exceed 5%, higher than the 2.4% predicted by inflation-linked models, though lower than the historical average due to slower expected global GDP growth. These lower returns are expected across all asset classes, not just gold.

Source: World Gold Council

The GLTER model also helps explain why gold’s long-term returns have consistently outpaced inflation and are expected to continue doing so. By tying gold’s performance to economic expansion rather than just inflation or financial market behaviour, the WGC’s model offers a more comprehensive view of the factors that drive gold’s price. This perspective challenges the traditional assumption that gold’s only role is as a hedge against inflation, demonstrating its broader value in a well-diversified portfolio.

The emphasis on economic growth, as opposed to just financial factors, highlights the role of gold in a changing global economic landscape. As the WGC notes, “any model that fails to account for economic growth alongside financial factors will prove insufficient in establishing gold’s long-term expected return.”

Technical Outlook: What’s next for Gold?

While gold has achieved impressive gains, the outlook remains mixed in the short term. The absence of another significant rate cut by the Federal Reserve may limit further weakening of the U.S. Dollar, keeping a lid on additional upside potential for gold. Moreover, rising U.S. bond yields could dampen the appeal of non-yielding assets like gold, leading traders to take a more cautious approach.

That said, with ongoing geopolitical risks and the potential for continued central bank easing, many analysts believe that gold’s long-term prospects remain strong. The WGC’s new GLTER model, which predicts annual returns above 5% over the next 15 years, underscores the enduring value of gold as an investment. Delegates at the recent London Bullion Market Association (LBMA) annual gathering predicted that gold could rise as high as $2,941 per ounce over the next 12 months, reflecting optimism about the metal’s future trajectory.

At the time of writing, Gold is holding above $2,700 with upward momentum evident on the daily chart. However, RSI edging up past 70 and prices touching the upper boundary of the bollinger band hints at overbought conditions, and a possible imminent slowdown in momentum. 

Buyers could face a hurdle at the $2,760 resistance level, with sellers likely to be held at the $2,643 and $2,616 support levels. 

Source: Deriv MT5

Disclaimer:

The information contained within this article is for educational purposes only and is not intended as financial or investment advice. 

It is considered accurate and correct at the date of publication. Changes in circumstances after the time of publication may impact the accuracy of the information. 

The performance figures quoted refer to the past, and past performance is not a guarantee of future performance or a reliable guide to future performance. 

No representation or warranty is given as to the accuracy or completeness of this information. Do your own research before making any trading decisions.