In a continuing development, investors continue to sell their shares in gold-backed exchange-traded funds (ETFs) for the fourth year in a row during 2024. This is happening despite gold prices hitting new record highs and the Federal Reserve resuming its monetary easing policy. This trend contradicts the traditional belief that gold is a safe haven during times of economic and political turmoil. We will shed light on the reasons for this shift in the gold markets and review the factors that are driving investors to make this move.
Optimism about interest rates and the rising dollar
Gold-linked ETFs saw a temporary recovery at the beginning of 2024. This optimism was driven by expectations that the Federal Reserve would cut interest rates, which could boost the value of gold. However, this momentum faded after the US presidential election in November, which saw Donald Trump win. This shift was reinforced by the strength of the US dollar, which prompted many investors to abandon gold funds.
Transformations in financial markets
Along with the strength of the dollar, other markets such as stocks and cryptocurrencies, including Bitcoin, have seen a significant influx of liquidity. These factors have made gold lose its appeal compared to other assets. Although gold is usually considered a safe investment tool during times of economic crisis, improvement in performance in other markets was enough to attract liquidity away from gold markets.
Gold as a safe haven: Does it still retain its appeal?
Gold has always been considered a safe haven during times of economic and political instability. In 2020, during the height of the pandemic, investments in gold-backed exchange-traded funds rose significantly. This shift was due to the great uncertainty caused by the pandemic. During that period, gold received huge inflows of investments as a means of hedging market risks.
The focus has shifted to physical gold
This trend began to decline two years after the peak of the pandemic, due to a change in US economic policies. The Federal Reserve began raising interest rates to combat inflation, which reduced the appeal of gold. Higher interest rates usually reduce the appeal of XAU as an investment asset, due to its lack of consistent financial returns compared to other assets that provide profitable returns in high interest environments.
At the same time, other markets witnessed new shifts. Geopolitical tensions resulting from conflicts in Ukraine and the Middle East prompted investors to focus on buying physical XAU. This led to increased demand for the yellow metal in emerging markets and central banks that sought to diversify their investment portfolios. These trends prompted many central banks to increase their purchases of gold, especially in Asian markets, which witnessed a significant increase in demand for physical XAU.
This shift in investment strategies reflects a new trend in global markets. Investors are now turning to assets that preserve value, especially in times of economic and political volatility. With concerns about global tensions increasing, investing in physical gold seems to have become a priority for many investors. Central Bank Purchases
On the other hand, David Miller, Chief Investment Officer at Catalyst Funds, believes that central banks will continue to increase their gold holdings in the coming years. report indicates that net central bank purchases of XAU exceeded 1,000 tons during 2022 and 2023. Central banks will likely continue this trend in 2024, especially as economic volatility persists.
Central banks continue to buy XAU, and major changes are reshaping other financial markets. Experts anticipate that protectionist policies under US President-elect Donald Trump will heighten the risks of inflation and trigger trade wars.
Fears of inflation and rising interest rates
Monetary policy is one of the most important factors that influence gold markets. Recently, many major economies have seen tightening measures in terms of raising interest rates to combat inflation. This has made XAU, which does not generate fixed financial returns, less attractive to investors looking for assets that can generate income.
However, there are some expectations that the high interest rate environment may reduce the incentives to invest in other markets such as stocks or bonds. In this case, XAU may regain its greater attractiveness if inflation concerns persist or if economic uncertainty persists.
Gold Outlook 2025
By 2025, some forecasts indicate that gold may return to the rise, especially in light of ongoing geopolitical risks, such as the instability in Ukraine and the Middle East. Many experts also expect the US government debt to increase significantly, which could negatively affect the value of the dollar and make XAU a safer option for investors.
Analysts also expect XAU to strengthen its role as a hedge against inflation in low interest environments. On the other hand, if geopolitical tensions persist, there is likely to be an increase in demand for gold as a safe haven under these circumstances.
Finally: How do investors view gold?
The withdrawal of funds from XAU markets in 2024 reflects a new trend of investors towards other markets such as stocks and cryptocurrencies. At the same time, gold remains one of the preferred investment assets for investors seeking to protect their money from risks. While experts expect volatility in XAU markets to continue in the near future, the yellow metal is likely to remain part of the diversification strategy in the portfolios of many investors.
