A Milestone Few Noticed

5 min read

In the middle of August gold passed a milestone it had never reached before. A few days later it set a new record high. In pounds it also reached a new high. For most British savers the moment passed without a word on the evening news. That silence says a good deal about how gold rises. It also says something about what the rise really measures.

A quiet milestone

On Friday 16 August gold topped $2,500 an ounce for the first time. Spot gold rose 2.1% that day to $2,508.82 by the afternoon in New York. The trigger was modest. Weak figures on American house building added to expectations that the Federal Reserve would cut interest rates sooner and further.

Gold rose by more than 20% in the first eight months of 2024. The path was steady. It set new records in March, April, May and July and again in August. It made a new closing high on 27 August and finished the month near that level. In sterling it set a record of its own in the middle of August.

Why the headlines missed it

News is drawn to drama. In early August the drama was in the stock market, where a sharp sell-off on 5 August filled the front pages. When shares recovered, attention moved on. Gold's climb was gradual, a little at a time, with no single day of panic to report.

There is another reason. In Britain the pound strengthened against the dollar over the summer. That softened the rise in sterling terms, so gold's progress in pounds looked less dramatic than it did in dollars. The record was there all the same.

Many savers also assume they have missed the move once a round number is passed. That instinct is understandable. But round numbers are a human habit, not a market signal. Gold does not know when it has crossed one.

Quiet rises are often the most telling. Gold did not need a crisis to reach a new record. It got there on steady demand from buyers who think in years, not days.

Who has been buying

The World Gold Council reports that central banks bought 483 tonnes of gold in the first half of 2024. That is the highest first half in its records, which go back to 2000. Poland and India were the largest buyers in the second quarter. India has already bought more gold this year than it did in either 2022 or 2023. Turkey has bought more than any other central bank so far this year.

We noted in July that China's central bank had paused its reported purchases. The record came anyway. Other central banks filled the gap. Buyers in the West have begun to return as well.

The figures show it. The World Gold Council reports that gold exchange traded funds, which hold physical gold on behalf of their shareholders, took in $3.7 billion in July. That was the strongest month since April 2022 and the third monthly inflow in a row. Funds in North America added $2 billion and funds in Europe $1.2 billion. Global holdings rose by 48 tonnes to 3,154 tonnes. Asian funds extended a run of inflows to 17 months.

This is a change of mood rather than a rush. Even after July, funds in North America were still $2.9 billion down for the year and funds in Europe $3.7 billion down. Western buyers had been sellers for much of 2024 and have only now begun to come back. Fortune reported that bets on higher prices by traders in the US gold futures market reached a near four year high in the week to 13 August. That is one more sign that interest is returning from a low base.

A record quarter for demand

The wider market tells the same story. Total gold demand in the second quarter, including large private deals made directly between buyers and sellers, reached 1,258 tonnes. That was up 4% on a year earlier and the strongest second quarter in the World Gold Council's data series.

Those private deals rose 53% to 329 tonnes. The average price in the quarter was $2,338 an ounce, 18% higher than a year before and a quarterly record.

High prices also had their usual effect. Jewellery demand fell 19% on a year earlier, which is why the overall picture is one of steady buying rather than a frenzy. Demand for bars and coins eased 5% to 261 tonnes, while mine production rose to 929 tonnes. Recycled gold rose 4%, its highest second quarter since 2012, as some owners took the chance to sell old jewellery at better prices. A market where some sell into strength while others keep buying is a healthy one.

The rate cycle has turned

The other driver is interest rates. As we wrote last month, the Bank of England made its first cut on 1 August. On 23 August the Chair of the US Federal Reserve, Jerome Powell, went further. "The time has come for policy to adjust," he said. Markets now expect the Fed to begin cutting this month.

Lower rates reduce the cost of holding an asset that pays no interest. They also tend to weaken the currency in which interest is paid. Both work in gold's favour.

The British decision was close. The Bank of England's Monetary Policy Committee voted by five to four for the cut, with four members preferring to hold at 5.25%. The Bank also said it expects inflation to rise to around 2¾% in the second half of this year, which is one reason it has been cautious about cutting again. For savers in cash, a lower Bank Rate alongside rising prices means a smaller real return.

What a record really measures

It is tempting to see a record high as a sign that gold has become more valuable. In a sense it has not changed at all. An ounce of gold is the same ounce it was in 1971, when the dollar's last link to gold was cut. No government can dilute it or debase it.

What has changed is the money used to price it. Since 1971 the dollar and the pound have each lost most of their buying power. Government debt in Britain and America is close to the size of each economy. Central banks have created vast sums of new money since 2008. Every new pound or dollar makes the ones already in circulation worth a little less.

Seen this way, a milestone is not a peak. It is a reading on a gauge. Each record in the gold price is, in large part, a record of the falling value of paper currency. The headline says gold has gone up. The quieter truth is that money has gone down.

That is why central banks keep buying. They understand that gold is the one reserve asset no government can print.

For British savers, UK legal tender gold coins such as the Britannia and the Sovereign offer direct ownership of that asset. Gains on them are exempt from Capital Gains Tax for UK residents.

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Sources

This article is for information only. The value of gold can go down as well as up.

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Gold Insights are independent articles, researched and written by our own team at Gold Tier Advisory.