The only investment hotter than AI right now might just be…gold.

Well, it sure seems like it. Gold, which is typically thought of as a safe haven from market volatility and economic uncertainty, has shot up nearly 60% so far this year, to a record high of $4,385 per ounce, as of the writing of this article. To give context, gold hit over $1700/ounce in 2011, and was valued at only $1,830/ounce as recently as October of 2023. So, what gives?

A few things, actually.

For starters, the U.S. Dollar and the price of gold tend to be inversely related—gold costs more when the U.S. Dollar is worth less. The dollar index, which measures the U.S. Dollar against a basket of other currencies, dropped from 110 at the start of the year to 98.5. That’s a drop of about 10.5%.

Another possible driver of increased gold prices is decreasing interest rates, as measured by the federal funds rate. That rate peaked in mid-2023, and has dropped by approximately 1 percent since that time. More cuts are expected this year and next. Many analysts believe that when rates are higher investors are incentivized to invest in bonds and other income assets, but become more likely to invest in gold when rates fall.

Gold’s status as a safe haven, which I mentioned earlier, might suggest that gold prices go up when people are concerned about the health of the economy and the stock market. In fact, we are currently seeing exactly this phenomenon. Per the Federal Reserve Bank of San Francisco, daily economic news sentiment has been dropping this year. Americans are concerned about inflation tied to tariffs and historically high P/E ratios in the stock market. Concerned investors tend to buy more gold, historically.

Despite these possible drivers of the increase in the value of gold, there is one thing happening that is unusual. At the same time that gold has been surging, the stock market has been performing well. That performance does not suggest that investors are fleeing the market for the safety of gold. Rather, it suggests some level of comfort in the market.

Will gold continue to surge? I wish I knew. If I did, you would be reading my column in the Wall Street Journal. The fact is that it is much easier to explain investment returns after they happen than it is to predict what will happen next. Just like any other asset, gold can lose value just as quickly as it can gain value; the “safe haven” tag is more of a psychological construct than any sort of investment guarantee. So be smart, be prudent, and only invest in gold if it fits your portfolio and risk profile.

However you choose to handle the gold bump, invest smart and invest well!

Larry Sidney is a Zephyr Cove-based Investment Advisor Representative. Information is found at https://palisadeinvestments.com/ or by calling 775-299-4600 x702. This is not a solicitation to buy or sell securities. Clients may hold positions mentioned in this article. Returns are not guaranteed and past performance does not guarantee future results. Consult your financial advisor before purchasing any security.