Gold price surging — where will it end?
Gold price surging — where will it end?
Over the past year, gold prices have risen from $1861 to $2642, a 42% increase during a time of market volatility.
During the past year, we have witnessed the gold price surge from $1861 to $2642, a 42% increase in only a year amid volatile financial markets. We cannot help to wonder— What happened? Will the current surge continue? Where will the gold price end?
Geopolitical Tensions and Fed Rate Cuts Drive Gold Price Surge
💥Geopolitical tensions have pushed up the gold price
Gold has long been considered as “safety haven”. Therefore, no wonder that the Israeli-Palestinian conflict in Gaza, which broke out one year ago and continued escalating till now, plus the ongoing Russia-Ukraine war, as well as the tensions between US and China, have pushed up the gold price.
💰Fed rate cuts further boosted the gold price
Traditionally, the gold price is negatively correlated with interest rates because gold is not an interest-bearing asset, meaning holding gold does not yield any interests, unlike other financial assets. However, an interest phenomenon was observed recently— in the first few months of 2024, the gold price climbed alongside US treasury bill yields. In other words, this time the gold price increased together with interest rates, and it lasted for a few months. The anomaly is generally interpreted that the support by geopolitical tensions overrode the drag of elevating interest rates during that time.
Has the inverse relationship between the gold price and interest rates changed this time? The answer is probably “no” judging by the most recent performance of gold. Following the unexpected cooling of US labour market and seemingly tamed inflation, the market interest rates dropped sharply since August; eventually, a 50bps rate cut by Fed happened. During this time period, the gold price rose at a faster pace— from August to September, a 7.7% increase was realized.
More gold is purchased as worldwide central banks diversify FX reserves
The central banks around the globe is purchasing more gold. This is part of the effort that the central banks are diversifying their FX reserves. From 2020 onwards, the share of USD as total foreign exchange reserves has decreased by 2.5% because of many reasons— improvements in financial markets and payment infrastructures in many countries, the potential sanction risks, the escalating geopolitical tensions, the deteriorating financial status of US, to name a few. Therefore, many central banks grow more interest in gold and aim to increase the share of gold in their FX reserves. The following graph illustrates how global gold reserves owned by central banks have gone up as the share of USD in FX reserves have dipped.
Notably, the central banks are prudent players in the gold market. Their buying is generally not very aggressive but their diversification might take years or even decades. If, for multifaceted considerations, the central banks around the globe decide to further diversify their FX reserves, there might be a consistent buying in the gold market.
So… where will it end?
The consistent rise of gold price is one of the most conspicuous financial phenomena this year. Because of ongoing geopolitical tensions, incoming rate cuts, and widespread efforts to diversify FX reserves, the market believe that the current uptrend is likely to be sustained. Some analysts pointed out that the destination of this upcycle might be somewhere near $3000. However, as the long-gold trade gets increasingly crowded, the downside risks are accumulating. Historically, when the gold price lost its steam, the retreat might be furious. So, think twice if you wish to invest in gold now.
Created by Wendy