Gold Prices: In a remarkable surge, the price of gold has reached an all-time high, propelled by a decline in the US dollar as traders increasingly anticipate interest rate cuts by the Federal Reserve in the coming year.
The safe-haven asset experienced a significant rally, climbing up to 3% to reach $2,135 per troy ounce on Monday, establishing a new record. Subsequently, it slightly receded to $2,025 per troy ounce, as per LSEG data.
This recent upswing is attributed to the 3.1% dip in the dollar against a basket of six other currencies since the beginning of November. The greenback currently hovers just above its lowest point in nearly four months. The decrease, coupled with a decline in US Treasury yields since mid-October, aligns with growing confidence among investors that the Federal Reserve will implement interest rate cuts early next year.
Gold’s current gains mark another phase in a robust rally that commenced in November of the previous year. This surge was fueled by extensive central bank acquisitions and investor apprehensions concerning conflicts in Ukraine, Israel, and Gaza. Despite the rise in real interest rates over the past year, typically dampening enthusiasm for non-yielding gold, demand for the precious metal remained robust.
The last record high for gold was achieved in August 2020, at $2,072.49 per troy ounce, during the initial impact of the coronavirus pandemic on the US economy. The price momentarily exceeded this level last Friday, reaching $2,075.09 per troy ounce. Nevertheless, gold still stands distant from its inflation-adjusted peak of about $3,300 per troy ounce in 1980.
Ross Norman, Chief Executive of Metals Daily, suggests that the recent surge is likely driven by speculative flows from futures traders during a period of low market activity. He notes that factors such as a declining dollar, favorable seasonal conditions, and geopolitical tensions have contributed to this trend.
The recent decline in bond yields, accompanied by the belief that interest rates have peaked and are poised to decline, has further propelled gold’s 12% ascent in the fourth quarter. Federal Reserve Chair Jay Powell’s recent warning about potential rate hikes added complexity to the scenario, emphasizing that policy is already in “restrictive territory.”
Analysts caution that sustaining gold’s current gains and consistently trading above the $2,075 per troy ounce threshold may prove challenging without more sustained buying from a broader range of market participants. Marcus Garvey, Head of Commodities Strategy at Macquarie, suggests that for a more sustainable breakthrough, the return of exchange-traded fund (ETF) buying, which is currently subdued, is crucial.
Factors Behind Gold Prices Record-Breaking Ascent
Gold prices have reached unprecedented highs, surging to a fresh all-time record recently. While the spike in the US dollar price of gold is noteworthy, hitting $2,135 per ounce, its strength is not solely attributed to a weakening US dollar. The sterling price of gold also hit a record, reaching almost £1,680 an ounce before slightly retreating to around £1,632.
The surge in gold prices is perplexing, with various factors contributing to its rally. The immediate cause seems linked to Federal Reserve Chair Jerome Powell’s less aggressive stance on Friday, particularly regarding the “higher for longer” policy. This prompted many to hit the “buy” button, propelling gold above the critical technical level of around $2,080.
Hopes of declining interest rates play a significant role in boosting gold prices, especially if there’s an implication that the central bank may not vigorously combat inflation. However, this alone doesn’t explain gold’s overall resilience throughout the year. Despite the conventional belief that rising interest rates should negatively impact gold, it has remained robust.
Geopolitics is another factor, given the current global political landscape. Yet, historical patterns suggest that gold tends to spike temporarily in response to negative news, quickly retracting as markets adjust to the situation’s scale.
Contrary to expectations, data from Bloomberg reveals that demand from investors in exchange-traded funds (ETFs) has not been a driving force. ETFs have sold off approximately 7.85 million ounces of gold this year, constituting an 8.4% drop.
An intriguing perspective on gold’s surge comes from Louis-Vincent Gave at Gavekal, who suggests that significant demand is emanating from wealthy consumers in emerging markets. Countries like India continue to be substantial buyers of gold, driven by growing domestic wealth, despite competition from domestic stocks.
The “de-dollarization” argument also comes into play, with China and Russia potentially seeking to diversify away from US government debt. Recent geopolitical developments, such as Saudi Arabia signing a renminbi “swap line” with the Chinese central bank, add a layer of “currency uncertainty,” providing another tailwind for gold.
While the de-dollarization argument is challenging, uncertainty about the future of global currencies is increasingly relevant. Factors like power struggles, the end of Pax Americana, Cold War 2.0, and technological advancements, including digital currencies like Bitcoin, contribute to the evolving landscape.
In light of these factors, gold remains a valuable component for portfolio diversification and acts as a form of “disaster insurance.” However, beyond this, any further investment in gold should be approached as a trade rather than a long-term strategy. Source thedailycourierng news