Gold prices soar to unprecedented heights.
Gold's value keeps climbing. Today, it reached an all-time high of $2523.80 per ounce. In fact, the price of this precious metal has gone up by over 20% this year alone. There are several reasons behind this surge: foreseeable drops in interest rates, intense demand from China, and geopolitical tensions in the Middle East.
The U.S. Federal Reserve is predicted to adopt a reversal in monetary policy in September by lowering interest rates. Previously, the central bank had raised their key interest rate to a range of 5.25 to 5.50% due to high inflation.
As interest rates decrease, the appeal of interest-free assets such as gold increases. Additionally, the decline in American interest rates tends to weaken the dollar, making gold, a commodity priced in USD, more appealing to international investors.
Furthermore, gold is often seen as a safe haven during times of crisis. Therefore, the ongoing unrest in the Middle East is also considered a factor. There seems to be no end in sight for the conflict in the Gaza Strip. Moreover, Iran has threatened retaliation following the targeted killing of radical Islamic Hamas and Lebanese Hezbollah leaders, while Israel has announced a heavy counterstrike if necessary.
China, the world's largest gold consumer, has been driving the market growth for almost two years now. Since late November 2022, the Chinese central bank has consistently been increasing its gold reserves, and it has acquired more gold than any other central bank worldwide. This is to reduce its reliance on the U.S. dollar, the global reserve currency, as a means for managing its foreign exchange reserves.
Private investors in China are also stockpiling gold as alternative investments have lost their luster. The Chinese real estate market is in a crisis, while the domestic stock market has been performing poorly for a while now. Moreover, due to the capital controls in place in China, private investors cannot easily diversify their investments into foreign markets.
As Anita Wright, a financial advisor from the British firm Bolton James, puts it, "The combination of lower interest rates, a weaker dollar, and strong demand from central banks creates an extremely favorable environment for gold, and it's plausible that gold could continue to rise, possibly even reaching the $2665 mark." According to Yeap Jun Rong, a market strategist at broker IG, the rally has every potential to continue.
In this favorable environment for gold, other asset classes might struggle to keep up. The increase in gold's appeal could lead to decreased interest in traditional savings methods.
Furthermore, the surge in gold's price and its potential to reach even higher levels might encourage other countries to increase their gold reserves as a form of financial protection.
