Gold's value soars to unprecedented heights
The cost of gold appears to be trending in just one direction: upward. This year alone, the precious metal has seen a 25% increase. Here's why.
The gold market's record-breaking streak persists. This morning, the price of a troy ounce (approximately 31.1 grams) hit an all-time high of nearly $2,590. In euros, the price reached a new peak of around €2,335 per ounce. Since the start of the year, gold has risen by a quarter. For comparison, the US Standard Stock Index S&P 500 has gained about 18% during the same period.
The gold price had hit new highs in recent trading sessions and climbed approximately 4% in the last week. According to analysts, the primary driver behind this surge is the anticipation of higher interest rates in the US. It's widely expected that the US Federal Reserve will initiate a monetary policy shift on Wednesday, reducing interest rates.
Rich investors and financial institutions often shift part of their assets into gold when interest rates decrease. With gold not yielding interest, the prospect of decreasing interest rates (for instance, on government bonds) boosts the demand for the precious metal.
Real interest rates, which can be achieved on the market with government bonds, are crucial - this means nominal interest rates minus inflation. If these become negative, investing money in relatively stable gold becomes a wise choice. This shift is currently occurring in anticipation of the US's announced interest rate shift.
Lower interest rates in the US typically weaken the dollar, making gold, which is traded in dollars, more appealing to many investors outside the US, increasing demand and the price.
Gold is in demand in China and India
Moreover, gold's price has risen substantially in recent months, defying high bond market yields and a robust stock market uptrend. Central banks, led by the Chinese central bank, are responsible for this trend. From late November 2022 to June 2023, it significantly increased its gold reserves. The reason: Like other emerging economies, China aims to reduce the dependence of its foreign exchange reserves on the dollar, the global reserve currency. According to the World Gold Council, central banks bought 483 tons of gold in the first half of the year. This is the most significant amount since the lobby association began collecting data.
However, it's not just the Chinese central bank that's buying gold; private investors are too. This is because alternative investments in China, a country with a population of 1.4 billion, are currently less appealing. On the one hand, the real estate market, where most families have invested their savings, is in crisis. On the other hand, the domestic stock market has not been performing well for a long time. And due to China's capital controls, private investors cannot switch to foreign markets easily.
There's also strong demand for gold in India, with a population of 1.4 billion. Gold is a traditional investment in India, and the central bank is also increasing its reserves.
The gold price rally is also fueled by the fact that many people worldwide view physical gold as a safeguard during crises - the Russian attack on Ukraine, Israel's war against Hamas, and a potential escalation of the trade conflict between the US and China are boosting the gold price.
Will it continue to rise sharply? Ascan Iredi, head of portfolio management at asset manager Plutos, is skeptical. "Gold will certainly continue to rise in the long term, but not at this pace," he said in an interview with ntv. "At least not unless the situation worsens."
The economic uncertainty caused by geopolitical tensions and potential market turmoil is driving investors to seek safe-haven assets, leading to an increased demand for gold. Consequently, the global economy's reliance on gold as a store of value is growing.
Given the surge in gold demand, many economies, such as China and India, are increasing their gold reserves as a strategic move to diversify their foreign reserves and reduce dependence on the US dollar.
