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Podcast: CIO's Wayne, Jon and Teck on the US shutdown, FX, and gold (13 min)

Thought of the day

Gold prices climbed above USD 4,000 per ounce for the first time on Wednesday, extending a rally that has lifted the metal more than 50% year-to-date. The ongoing US government shutdown has injected fresh momentum into the trade, alongside mounting fiscal concerns in Japan and France amid recent political leadership changes.

Additional support continues to come from the renewed US rate cut cycle and concerns about the US dollar's longer-term value. While the scale and speed of the gold rally may mean volatility could pick up from here, we still see reasons to position for further price gains into next year:

Fed easing and sticky inflation supports gold. The US real interest rate, the opportunity cost of holding non-yielding assets like gold, has dropped to its lowest level since mid-2022. This reflects both the market’s expectations for incremental Fed rate cuts and that US inflation has remained above the Federal Reserve’s 2% target. We think real rates can fall further from here, potentially into negative territory. We think this will further undermine the appeal of the US dollar and therefore boost investment flows into bullion.

Demand remains near record highs. Investor appetite for gold is strong; exchange-traded fund (ETF) holdings are nearing previous records, and we expect central bank purchases to reach 900-950 metric tons this year, just below last year’s historical peak. Retail demand has also been robust, with the Perth Mint reporting a 21% month-on-month jump in gold sales in September. Our forecast for global gold demand this year is around 4,850 metric tons, which would be the highest level since 2011. If private investors begin diversifying US Treasury holdings into gold, which has been a trend among central banks, spot prices could be pushed even higher.

Lingering uncertainty underscores gold’s hedge value. Gold has outperformed all major equity and bond indices this year, reflecting in part its portfolio role as a hedge against economic, political, and geopolitical risk. At the same time, the precious metal’s low correlation with equities and bonds, especially during periods of market stress, also makes it a valuable diversifier.

So we think the rally is not yet done—we expect prices to rise to USD 4,200/oz over the coming months—and keep our Attractive rating on gold in our global strategy. For investors seeking portfolio resilience, we recommend a mid-single-digit percentage allocation to gold, which has proven its value as a strategic diversifier and hedge against inflation and uncertainty. With equities at record highs, we also advocate for diversification through quality bonds and hedge funds to help manage risks at the portfolio level. In our view, gold’s store-of-value characteristics, liquidity, and ability to hedge against shocks justify a continued place in well-diversified portfolios.