The price of gold has skyrocketed, up 60% this year and more than 130% since late 2023. On October 20, prices topped $4,350 per ounce, though they are volatile and a correction of over 5% occurred the next day. Here's a brief look at some aspects of this phenomenon.

Geopolitical and economic uncertainty and the resulting demand for gold as a safe haven are clearly playing a role in the rise in prices. Gold serves as a hedge against risks we are currently seeing, including trade tensions, fiscal uncertainty, high public debt, labor force shifts, and significant global conflicts. Some believe fear of a possible AI stock bubble has led investors to use gold as a hedge, though other indicators rebut that theory.

In addition to uncertainty, there are other potential reasons for the strong rally in gold. One factor is that low real interest rates (the nominal rate minus inflation) and the expectation of future interest rate cuts are enhancing gold's appeal relative to cash or bonds. Another reason is that a weaker US dollar supports the price. Gold is valued and traded in dollars, and less robust greenbacks makes it cheaper (and more attractive) to holders of other currencies.

There is also evidence of central banks, especially in emerging economies, increasing their gold reserves. It appears that China has been buying large volumes of gold (enough to push up prices) to provide insulation against a trade war. Institutional investors including exchange traded funds (ETFs) are also building reserves. These sources of demand are contributing further to higher prices.

All of these factors (high uncertainty, lower yields, weaker dollar, and increased demand both officially from governments/central banks and privately) are contributing to higher gold prices. In addition, as with many markets, demand can generate further demand. While gold is no meme stock, there are some aspects of the current situation that are similar. In fact, there is a mystique surrounding gold as a "solid" or "real" commodity that stretches back millennia to ancient times. In that sense, its historical aura mimics that of model viral excesses.

From a policy perspective, high gold prices reinforce the idea that inflationary and monetary dynamics are important. If prices remain stubbornly sticky and policy is loose, gold remains attractive. Uncertainty is also a clear contributor to demand. Gold's rise is a barometer of stress in the global financial system, and responses will affect future prices.

In summary, a variety of factors are coalescing to support the recent surge in prices, and have created this Midas moment. Barring a major shock, however, the most likely outcome is that the price will eventually return at least partly back to earth. It always does. Stay safe!