Gold Is at a Record High. Why It Is Set to Rise Even More.

Is gold’s strength a flash in the pan or a golden opportunity?

The yellow metal just completed its best two-quarter stretch in eight years on its way to a record high of $2,319 per ounce today.

That performance comes as a bit of a surprise at first blush. After all, gold prices typically rise when interest rates decrease and fall when rates swing higher. Yet recent economic data suggest the Federal Reserve will have to keep interest rates elevated for longer than previously thought to tame inflation.

There has been some good news on inflation. Last Friday, for instance, we learned that the core personal consumption expenditures (PCE) index, which is the Fed’s preferred inflation measure, rose just 2.8% year over year and 0.3% month over month, as expected , in February.

Shorter-term trends paint a more challenging picture for the Fed, however, given that the three-month core PCE trend reflects 3.5% annual growth compared with 2.5% in late 2023.

“The relevant news is that recent inflation data are rising briskly,” writes Michael Lewis, who heads Free Market Inc., an economic consulting firm. This translates into higher rates for longer as the odds of a June rate cut have fallen to 58% from 73% a month ago. Mary Daly, the chief of the San Francisco Federal Reserve, said Tuesday there is “ really no urgency ” to cut rates. Fed Chairman Jerome Powell echoed that sentiment today.

Monday’s ISM manufacturing index report reinforces that narrative . In March, the index delivered its strongest growth since September 2022, rising to 50.3, easily exceeding the expectation of 48.4.

Not surprisingly, on Monday, stocks fell as the yield on the 10-year bond surged to 4.32%. Tuesday we saw more of the same with key stock indexes falling and the 10-year yield rising as high as 4.4% , its highest level in 2024 . Higher rates have been pressuring stocks, bonds, and cryptocurrencies .

Gold is powering higher, however. March 22 is the last day that gold prices fell. The price of gold has risen 9.7% this year while the yield on the 10-year has gained 10.4%.

“Gold is the near-zero yielder that is then showing record demand, despite a world where high nominal yields and carry are still dominant,” wrote Deutsche Bank macro strategist Alan Ruskin in a newsletter last week. “If gold prices won’t go down in an inflated nominal yield world, they can surely go up as the G-10 yield plateau gives way, and yields likely start their descent in” the second half of this year, Ruskin continued.

So what explains gold’s recent rise amid higher rates? Strong demand from China is one factor . The People’s Bank of China went on a buying spree last year, acquiring a net 225 metric tons of gold—the most among all central banks and the country’s biggest expansion of gold reserves since 1977.

With China’s central bank reserves at a record high, its consumers are also actively buying the precious metal, partly due to concerns about their economy and stock market. Among Chinese investors, demand for gold-related ETFs is “booming,” according to The Wall Street Journal, and Chinese imports of gold have surged 51% in the first two months of 2024 compared with the same period last year.

Gold’s more volatile counterpart, silver, surged to a two-year high today, gaining 5% to $27.22 per ounce. Unlike gold, which is at a record high, silver would need to rise more than 80% to reach its 2011 high of near $50.

“The formerly nonchalant silver finally appears ready to join gold’s advance,” John Roque, a technical analyst at 22V Research, wrote in a note, Barron’s reported . “$30 as the first target and then, presuming a breakout, $40 as the second target.” Silver prices are up 12.5% this year.

The entire commodities complex is showing relative strength as the Bloomberg Commodity Index is at its highest level since December . Crude oil is 20.6% higher this year.

Safe-haven demand for gold may increase given fast-rising geopolitical tensions in the Middle East. Moreover, concerns about the national debt are growing louder and more pointed from notable figures across the political spectrum. Unfortunately, there is no indication that politicians will quit pandering to short-term considerations (meaning votes) by making tough choices. As such, expect them to keep playing Kick the Can until one of them slices their foot.

Given all of this, the outlook for gold remains bright . On March 29, Barron’s cited an analysis by economist Charles Gave, founder of Gavekal Research. “The S&P 500 is on the verge of becoming overvalued versus the stock of capital, while gold is almost undervalued against my measure of retained earnings.”

Gave added, “Gold is ‘undervalued’ against the S&P 500 by a hefty -52% and -13% versus its own long-term trend. In contrast, the S&P 500 stands 33% above its own long-term trend level.” Recommending that investors hedge equity exposure with at least 20% of their portfolio in gold, Gave concluded, “At this point my preference based on the relative position of the two reserve assets is to favour gold, followed by equities.”

The hottest crypto trade has turned cold. Some investors are saying “told you so,” while others are doubling down.

It was the move to make for much of the year: Sell shares or borrow money, then plough the cash into bitcoin, ether and other cryptocurrencies. Investors bid up shares of these “crypto-treasury” companies, seeing them as a way to turbocharge wagers on the volatile crypto market.

Michael Saylor pioneered the move in 2020 when he transformed a tiny software company, then called MicroStrategy , into a bitcoin whale now known as Strategy. But with bitcoin and ether prices now tumbling, so are shares in Strategy and its copycats. Strategy was worth around $128 billion at its peak in July; it is now worth about $70 billion.

The selloff is hitting big-name investors, including Peter Thiel, the famed venture capitalist who has backed multiple crypto-treasury companies, as well as individuals who followed evangelists into these stocks.

Saylor, for his part, has remained characteristically bullish, taking to social media to declare that bitcoin is on sale. Sceptics have been anticipating the pullback, given that crypto treasuries often trade at a premium to the underlying value of the tokens they hold.

“The whole concept makes no sense to me. You are just paying $2 for a one-dollar bill,” said Brent Donnelly, president of Spectra Markets. “Eventually those premiums will compress.”

When they first appeared, crypto-treasury companies also gave institutional investors who previously couldn’t easily access crypto a way to invest. Crypto exchange-traded funds that became available over the past two years now offer the same solution.

BitMine Immersion Technologies , a big ether-treasury company backed by Thiel and run by veteran Wall Street strategist Tom Lee , is down more than 30% over the past month.

ETHZilla , which transformed itself from a biotech company to an ether treasury and counts Thiel as an investor, is down 23% in a month.

Crypto prices rallied for much of the year, driven by the crypto-friendly Trump administration. The frenzy around crypto treasuries further boosted token prices. But the bullish run abruptly ended on Oct. 10, when President Trump’s surprise tariff announcement against China triggered a selloff.

A record-long government shutdown and uncertainty surrounding Federal Reserve monetary policy also have weighed on prices.

Bitcoin prices have fallen 15% in the past month. Strategy is off 26% over that same period, while Matthew Tuttle’s related ETF—MSTU—which aims for a return that is twice that of Strategy, has fallen 50%.

“Digital asset treasury companies are basically leveraged crypto assets, so when crypto falls, they will fall more,” Tuttle said. “Bitcoin has shown that it’s not going anywhere and that you get rewarded for buying the dips.”

At least one big-name investor is adjusting his portfolio after the tumble of these shares. Jim Chanos , who closed his hedge funds in 2023 but still trades his own money and advises clients, had been shorting Strategy and buying bitcoin, arguing that it made little sense for investors to pay up for Saylor’s company when they can buy bitcoin on their own. On Friday, he told clients it was time to unwind that trade.

Crypto-treasury stocks remain overpriced, he said in an interview on Sunday, partly because their shares retain a higher value than the crypto these companies hold, but the levels are no longer exorbitant. “The thesis has largely played out,” he wrote to clients.

Many of the companies that raised cash to buy cryptocurrencies are unlikely to face short-term crises as long as their crypto holdings retain value. Some have raised so much money that they are still sitting on a lot of cash they can use to buy crypto at lower prices or even acquire rivals.

But companies facing losses will find it challenging to sell new shares to buy more cryptocurrencies, analysts say, potentially putting pressure on crypto prices while raising questions about the business models of these companies.

“A lot of them are stuck,” said Matt Cole, the chief executive officer of Strive, a bitcoin-treasury company. Strive raised money earlier this year to buy bitcoin at an average price more than 10% above its current level.

Strive’s shares have tumbled 28% in the past month. He said Strive is well-positioned to “ride out the volatility” because it recently raised money with preferred shares instead of debt.

Cole Grinde, a 29-year-old investor in Seattle, purchased about $100,000 worth of BitMine at about $45 a share when it started stockpiling ether earlier this year. He has lost about $10,000 on the investment so far.

Nonetheless, Grinde, a beverage-industry salesman, says he’s increasing his stake. He sells BitMine options to help offset losses. He attributes his conviction in the company to the growing popularity of the Ethereum blockchain—the network that issues the ether token—and Lee’s influence.

“I think his network and his pizzazz have helped the stock skyrocket since he took over,” he said of Lee, who spent 15 years at JPMorgan Chase, is a managing partner at Fundstrat Global Advisors and a frequent business-television commentator.

Gold Is at a Record High. Why It Is Set to Rise Even More.

Selloff in bitcoin and other digital tokens hits crypto-treasury companies.