Billionaire investor David Einhorn shares an overlooked theory for why gold prices have spiked so much
Kylie Kirschner
- The recent gold rally is counterintuitive, as high interest rates typically make bullion less attractive.
- But billionaire investor David Einhorn has a theory that he shared in his latest investor letter.
- Einhorn suggests that gold's rally is potentially due to countries in the East buying gold from Western nations.
Gold has had a record-setting year so far in 2024.
That being said, the commodity's sudden surge may come as a surprise. That's because the macro environment was supposed to create headwinds to gold's price appreciation, as the Federal Reserve's higher-for-longer interest rate stance typically makes other investments like bonds and saving accounts more appealing compared to the metal, as it's not a yield-bearing asset.
To explain the strong run for gold, billionaire investor David Einhorn offered a potential theory in his latest letter to investors published this week.
"While it's possible the advance was related to the market beginning to doubt the sustainability and wisdom of both monetary and fiscal policies, other indicia suggest that this was not the case," Einhorn said in the letter.
Instead, the Greenlight Capital founder said there's been a "secular trend" of the countries in the East buying gold from Western nations.
"Perhaps the West is running out of gold it is willing to sell, while Eastern demand has remained strong enough to force the price higher," he said in the statement.
Indeed, global central banks have been racing to buy gold, snapping up over 1,000 tonnes for the past two years straight, according to data from World Gold Council — and one of the biggest buyers is China.
The world's second-largest economy has been crippled by a sluggish economy for years, with an ailing property sector, a flailing stock market, and a persistently high unemployment rate. This has led its central bank and consumers to hoard precious metal as a stable store of value and as a way for the People's Bank of China to diversify reserves away from the dollar.
For 17 months straight, the PBOC has been gobbling up gold, increasing its holdings by 16% in that time.
The World Gold Council reveals India and Singapore have also been scooping up gold to hedge against global economic turbulence.
Gold's soaring demand is turbocharging its prices, with economists predicting the rally to rocket even higher as geopolitical uncertainties and macro hurdles like inflation fuel more gains.
Top economist David Rosenberg predicts another 15% upswing in the price of the yellow metal, with a potential 30% on the table as central banks consider rate cuts, but he emphasized that gold can rally no matter if the economy ends up having a soft landing or a deeper recession.
Market guru Ed Yardeni, meanwhile, predicts gold could surge to $3,500 by next year, hinting at a potential 50% upside. He draws parallels to the 1970s Great Inflation era, suggesting current inflation trends could propel gold to new heights.
Others, like billionaire investor Ray Dalio, say gold can hedge risks stemming from high government debt levels. In a recent post, he said he's owning gold because the risk of a debt or an inflation crisis is rising.