Understanding the Surge in Gold Prices
With a surge in demand from central banks to individual investors, the gold market is experiencing record highs. Discover why everyone, from financial institutions to everyday consumers, is turning to gold as a safe haven asset.
It seems like everyone, from central banks to Costco customers, is investing in gold these days. The price of spot gold reached $2,364 per ounce on Tuesday, following seven consecutive days of record highs. Just the day before, it was trading at $2,336 per ounce. Year on year, the price of gold has increased by 16.5%.
Investors anticipating a cut in the Federal Reserve's benchmark interest rate are the main reason for the increase in prices. However, other factors contributing to the surge include central banks, particularly China, buying gold to reduce dependence on US dollars.
Central banks view gold as a reliable store of value over the long term and a safe haven during periods of economic and international uncertainty.
Gold is seen as a strong investment choice. When interest rates go down, the price of gold usually goes up because people prefer to invest in gold rather than assets like bonds. Many investors see gold as a way to protect themselves against inflation, believing that gold will hold its value even when prices go up.
Shoppers outside a Costco store in Bayonne, New Jersey, US, on Saturday, Dec. 9, 2023.
Shoppers outside a Costco store in Bayonne, New Jersey, US, on Saturday, Dec. 9, 2023.
Angus Mordant/Bloomberg/Getty Images
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The People’s Bank of China continued to increase its gold reserves in March, marking the 17th consecutive month of purchases. They added 160,000 ounces, bringing their total gold reserves to 72.74 million troy ounces, as reported by Reuters.
According to a research note by UBS on April 9, central banks are looking to diversify their holdings away from US dollars by investing in gold, especially amidst geopolitical uncertainties. With China boosting their reserves, the demand for gold is on the rise, contributing to the already increasing prices driven by traditional investors.
Chinese investors are turning to gold as a different type of investment due to decreases in property values and stock prices in recent years, as mentioned in a research note by Capital Economics on April 9.
Similarly, other central banks such as India and Turkey are also boosting their gold reserves. UBS explains that India's growing GDP is a key factor driving these acquisitions.
A sign of the times?
Central banks demanding gold is a sign of waning reliance on the dollar, according to Ulf Lindahl, CEO at Currency Research Associates.
Central banks are finding dollars less attractive as they aim to reduce economic dependence on the US, as mentioned by Lindahl in an email.
According to a research note from JP Morgan in March, countries not aligned with the US may start accumulating gold as a way to shift away from dollars and lessen their vulnerability to sanctions.
Janet Yellen (left) arrived in Guangzhou on Thursday.
Janet Yellen (left) arrived in Guangzhou on Thursday.
Pedro Pardo/AFP/Getty Images
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The surge in gold prices since 2022 has been attributed to central bank purchases, as highlighted in the note. JP Morgan suggests that gold may be entering a prosperous period, given that central banks bought more than double the average amount of gold in 2022 compared to the previous decade.
Prices are increasing as US Treasury Secretary Janet Yellen visits China to talk about financial stability in US-China relations, specifically the excessive production of Chinese electric vehicles.
Mark Zandi, the chief economist at Moody's, warns that rising oil prices are a concern for the US economy.
Higher oil prices are likely to stoke concerns over inflation, boosting gold prices, according to the UBS research note.
The usual perception of gold
Investors are predicting rate cuts from the Fed this year, which is causing gold prices to rise. However, there is some uncertainty about whether the Fed can control inflation without harming the economy, a scenario known as a soft landing.
According to UBS's research note on April 9, the expectation of Fed rate cuts remains the primary reason for the positive outlook on gold.
Fed Chair Jerome Powell mentioned on April 3 that inflation is progressing towards the Fed's target of 2%, although it may not always be smooth sailing. He also indicated that rate cuts to stabilize the economy are expected to start later this year.
According to data from CME Group, 51% of investors anticipate a quarter-point cut in June. However, the job growth data for March exceeded forecasts, leading to uncertainty about the necessity of multiple rate cuts in a robust economy.
The Personal Consumption Expenditures price index, which is the preferred inflation gauge of the Fed, increased by 2.5% in the 12 months leading up to February. This uptick is slightly higher than January's 2.4% rise, as shown in the Department of Commerce data released recently.
Looking at the monthly data, the core PCE price index, which excludes the more volatile food and energy categories, went up by 0.3%. This index is considered important by Fed officials as it gives a good indication of underlying inflation trends. Although this increase is lower than January's 0.4%, which was the fastest growth in a year.
Gold prices are currently on the rise, but why? Some investors are getting caught up in the excitement surrounding gold bullion, causing prices to increase even more. On platforms like Reddit, proud gold buyers frequently share about their growing collections.
Costco started offering gold bars for sale online in August and silver coins in January. According to Wells Fargo's estimate, the company could be selling up to $200 million worth of gold and silver every month. In December, Chief Financial Officer Richard Galanti mentioned to analysts that the company had sold over $100 million in gold bars in the previous quarter.
An investment note on April 9 highlighted the increasing frequency of Reddit posts, fast online sell-outs of products, and strong monthly e-commerce sales. This indicates a significant increase in momentum since the launch of gold and silver sales.
Lindahl mentioned that when prices start to show a steady increase, "trend followers" and other investors quickly join in, anticipating even higher prices in the long run.
Additionally, it is important to remember that gold is a popular choice for investors during times of political uncertainty. With elections taking place in over 60 countries this year, such as the US presidential election, the rise in geopolitical and economic instability highlights the enduring value of this precious metal.
Editor's P/S:
The recent surge in gold prices highlights the growing demand for this precious metal as a store of value during periods of economic and political uncertainty. Central banks, particularly China, are increasing their gold reserves to reduce their reliance on the US dollar. Individual investors are also turning to gold as a hedge against inflation and geopolitical risks.
The expectation of interest rate cuts by the Federal Reserve has further boosted gold prices. Investors are seeking alternative investments to bonds, which offer lower returns in a low-interest-rate environment. Additionally, rising oil prices and strong consumer spending are fueling inflation concerns, making gold an attractive safe haven asset. The influx of retail investors, including those on platforms like Reddit, has also contributed to the surge in demand for gold.
