Unprecedented Rise: Gold Reaches New Heights
Surging gold prices reach unprecedented levels due to rising investor expectations of interest rate cuts, a weakening dollar, and escalating geopolitical tensions
On Monday, gold prices reached a record high due to investor anticipation of interest rate cuts, a declining dollar, and geopolitical unrest. The price of gold surged up to 3% during Monday trading, hitting $2,135 per ounce, surpassing the previous record of $2,072 set in August 2020. However, prices fell later in the day to $2,023 by 11:57 a.m. ET.
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Traders work on the floor of the New York Stock exchange during morning trading on November 10, 2023 in New York City.
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Higher interest rates push up the yields on assets such as US Treasuries, drawing in investors.
However, when interest rates are low, declining, or expected to decline, the demand for Treasuries decreases. Conversely, gold, which does not offer interest, becomes relatively more appealing. The yield on the 10-year US Treasury note has decreased from its 16-year peak of 5% in mid-October to 4.3% on Monday.
Daria Efanova, head of research at trading platform Sucden Financial, noted on Monday that the end of the tightening cycle has affected longer-term yields, creating a positive environment for gold as a non-yielding asset. According to John Reade, a market strategist at the World Gold Council, gold prices could potentially surpass Monday's record high due to investors predicting multiple rate cuts in the coming year.
The US dollar has been negatively impacted by the predicted rates, which has increased the appeal of gold. When interest rates rise, it typically strengthens a currency by attracting more international capital. Conversely, when rates decrease, the value weakens. Last month, the dollar fell by 3% against major currencies, making gold more affordable for foreign investors and increasing demand and prices.
Geopolitical risk
Gold has also enjoyed a significant boost over an extended period due to a pervasive sense of worldwide apprehension. According to JPMorgan CEO Jamie Dimon, the current era may be one of the most perilous in recent history.
Investors often view gold as a secure investment due to its tangible and limited supply, which theoretically helps it retain its value. This year, the price of gold has already increased by 10%. According to Reade, "The geopolitical risk environment seems to have shifted, with Russia's invasion of Ukraine, ongoing conflicts in Israel and Gaza, trade disputes between the US and China, and concerns about the South China Sea and Taiwan all contributing to the change."
Central banks in emerging markets have been increasing their stockpile of gold due to a more unstable global environment, according to Reade. Additionally, policymakers in these countries are turning to gold as a safer alternative to foreign exchange reserves that have been frozen in the West, following the freezing of Russian central banks' reserves. According to the World Gold Council, central banks in emerging markets bought an average of 473 metric tons of gold per year between 2010 and 2021. However, last year they bought 1,100 metric tons, and in the first three quarters of this year, 800. Reade predicts that this rapid pace of gold purchases could continue for several years.
Roughly 25% of central banks indicated in a May survey their intentions to boost their gold reserves within the next year. "Worries regarding the unstable global economy and the Israel-Hamas conflict have driven investor interest in safe-haven assets such as gold," noted Victoria Scholar, head of investment at Interactive Investor. "Furthermore, predictions of future Fed rate reductions in the next year have contributed to the declining value of the US dollar, further enhancing the appeal of gold."
