Since ancient times, gold has been considered a symbol of power and wealth, thanks to its particular characteristics. In addition to being a scarce commodity, it is a noble metal, valued for its low alterability, malleability, ductility, durability and divisibility. Thus, throughout the history of mankind, from the earliest civilizations up to the present day, it has been used for the production ofrom the earliest civilizations to the present day, gold has played an important role in the history of mankind, from the earliest civilizations to the present day, gold has played an important role in shaping economies.

While gold was originally used primarily for jewelry, it has also been used historically as a means of payment and a store of value, it has also been used historically as a means of payment and store of value. It should also be noted that, in recent history, there are some electronics companies that use it in the manufacture of electronic components.

Even, gold functioned as a monetary standard between the 18th and 19th centuries, during which time the value of a country's currency was associated with a certain amount of gold held in reserves. In 1971, the gold standard was officially declared to have ended and the use of fiduciary money was installed in the world, which is still in force today. It must be said, however, that talking about monetary standards would take us to another column.

In any case, the end of the gold standard did not dampen interest in gold and it continues to be an asset of high interest: for governments, because they see it as a factor of monetary stability that helps to strengthen confidence in economic stability; and for investors, because they see it as a safe haven asset, especially in times of crisis and uncertainty.

Since the end of 2022 and to date, the price of gold has maintained an upward trajectory in international markets, which has meant an increase of 35%. Of this increase, half has occurred in just the five months so far this year. Precisely, this week the metal reached a new high of over US$2,380 per troy ounce.

So what has driven the recent gold rally? what has driven gold's recent rally? Well, the reasons are manifold. Firstly, a policy of de-dollarization or, in other words, greater reserve diversification, mainly by developing economies. diversification in reserves, mainly on the part of developing economies. There is also concern about the rapid growth of U.S. public debt. There is also the increase in geopolitical tensions in the world. There are also the risks of recession, because although the figures point to soft landings in the main economies for the current cycle, the fact is that global activity is experiencing a significant loss of momentum. Inflation, although it has eased, remains high and, as a consequence, interest rates also remain high. Finally, it is an election year in the world, with more than 50% of the population going to the polls and with the most important presidential elections in the world on the horizon.

Let us remember, then, that the characteristics of the shiny metal validate it as a stable and reliable security, with a special status among financial assets, whose value tends to rise in periods of high economic, political and geopolitical uncertainty. This is why the strong appreciation mentioned above comes from a voracious appetite, both from investors and central banks around the world.

Gold is an important component of central bank reserves due to its safety, liquidity and profitability characteristics, three of the key qualities that monetary authorities seek to preserve and/or increase the value of their reserves. In addition, gold's tangibility allows a country to diversify its portfolio. In this regard, it is estimated that central banks hold it is estimated that central banks hold in their vaults, in sum, about one-fifth of all the gold that has been mined throughout history. The rest would be found in private warehouses and large jewelry stores and, of course, in our grandmothers' jewelry boxes.

Thus, the prevailing uncertainty continues to motivate central banks to increase their gold reserves. The growing demand from Asia, in particular China, is particularly noteworthy. As of the first quarter of 2024, the countries with the largest amount of gold reserves denominated in USD are the USA, Germany, China, Italy and France; The United States is the country with the largest amount of physical gold reserves, with more than 8,000 tons stored in its 12 federal banks throughout the country, of which more than half are in a deposit known as Fort Knox, located in Kentucky.

We should also bear in mind that, after financial crises, military conflicts are considered the second greatest source of uncertainty in the markets. In times of war, such as the current one, gold functions as a safe investment. That is why geopolitical tensions in the Middle East and between Russia and Ukraine have also increased interest in the commodity.

Other factors to which the gold price is also sensitive are inflation, interest rates (changes in the money supply), excessive spending increases and dollar movements. While inflation has fallen significantly since the mid-2022 highs, it is still above central bank targets, especially the Fed's, so there is still pressure on the gold price as it is seen as a hedge against inflation. Conversely, when treasury yields rise, gold tends to show a downward trend. As for the relationship with the dollar, it is rather inverse; a stronger dollar would tend to keep the price of gold lower and vice versa. However, it is important to note that, in periods of systemic risk and high uncertainty, both gold and the dollar tend to be used as safe haven assets and move in the same direction. Any resemblance to recent reality... is not mere coincidence?

In short, we could say that the growing gold reserves in China and other developing economies support much of the increase in gold prices over the long term, but the price fluctuations we see in the short term would be more related to interest rate movements and the strength of the U.S. dollar.

Going forward, most forecasts suggest that this bullish behavior in gold will continue, albeit with somewhat less momentum for the remainder of the year, basically because most of the reasons noted above as the explanation for gold's recent rally will remain in place.

Source: Bloomberg, WB, Fynsa Strategy

*The title of this note "El Dorado" refers to the popular legend of the time of the conquest of America. It was believed that there was an entire city bathed in gold, which motivated the search for it by many, but it was never found. Some archaeological discoveries suggest that El Dorado was not a territory, but referred to a person, since in the coronation ceremony the Muisca kings were covered with gold (aborigines who inhabited the territory called by the conquistadors as the New Kingdom of Granada, which today corresponds to Colombia, Venezuela, Ecuador and Panama).

Milene Rodriguez
Strategy and Investment Analyst