Inside the Current Rise in Gold Prices

Inside the Current Rise in Gold Prices

Gold, the essential quantifier of wealth for most of human history, continues to pull its weight in the modern economy. Today, Gold is a safe bet against economic downturns and uncertainty, with a historical record of holding its value in the face of inflation and other market events. Its value stems from its finite supply, unlike currencies- whose supply can be influenced by their issuing Banks.

The precious metal had a 40% increase in average price from 2019 to 2023, rising from $1,392 to $1,800 per ounce. By early March this year, its value has already crossed USD 2,000 an ounce.

Factors Affecting the Price of Gold

Several macroeconomic indicators exert significant influence over gold prices. Among these, perhaps none is as impactful as interest rates set by central banks. Gold, a non-interest-bearing asset, competes with interest-bearing assets such as bonds. When interest rates rise, the opportunity cost of holding gold increases, leading investors to reallocate their portfolios toward assets offering higher returns. Consequently, gold prices tend to decline during periods of rising interest rates and vice versa.

Moreover, currency movements play a pivotal role in determining gold prices. Since Gold is priced in US dollars on global markets, fluctuations in the dollar value directly impact gold prices. A weaker dollar typically translates to higher gold prices, as it becomes cheaper for holders of other currencies to purchase Gold.

Geopolitical events also wield considerable influence over gold prices. Political instability, conflicts, trade disputes, and even diplomatic tensions can trigger a flight to safety among investors, driving up the demand for Gold and its price.

Behind the Recent Price Rise

The latest rise in Gold prices is the culmination of many factors. It is not the only one experiencing a price boost in this market, with investors responsible for raising the price of stocks, bonds and cryptocurrency.

A weakening US Dollar, falling bond rates, the US Federal Reserve’s predicted interest rate cuts, and recession fears in Canada have also contributed towards a bullish market for Gold. The lower rates currently offered on bonds and cash accounts have blunted their competitive edge over Gold- which traditionally offers no interest.

Geopolitics also play a major role in the saga. The past few years have been an interesting timeline for international relations, particularly the Russian invasion of Ukraine and the consequent sanctions from the USA and its allies. These measures have driven countries with strained ties with the US in search of alternatives to rival the Dollar.

This charged atmosphere has been conducive to the rise of Gold, with Central Banks purchasing 1082 and 1037 tonnes of Gold in 2022 and 2023 compared to annual purchases of 492 between 2012 and 2021. China alone reported a 225-tonne net increase in its gold stockpile during this period.

Predicting the Future for Gold

Forecasting gold prices with absolute certainty remains a tricky endeavour, given the many factors at play. However, analysts often rely on a combination of technical analysis, macroeconomic indicators, and geopolitical assessments to provide insights into potential price movements.

The common sentiment among analysts and experts is that the price of Gold will continue to rise in 2024, considering the high inflation present in major economies and forecasted interest rate cuts in the near future for the USA and Canada.