The price of gold has reached new heights, surpassing the $2,140 mark per ounce on Tuesday, March 5, 2024. This surge is driven by a confluence of factors, highlighting the enduring appeal of this precious metal during times of economic and political uncertainty.
Some financial backers are becoming more assured that the Federal Reserve will move its focus to decreasing interest rates by June 2024, after implementing a series of increases aimed at controlling inflation. Data from CME FedWatch suggests a 68% chance of a rate reduction by the end of the second quarter. This shift in monetary policy could significantly impact the gold market.
"The market is pricing in a high likelihood of rate cuts, and that's helping gold," explains Ed Moya, senior market analyst at OANDA. Lower interest rates typically make gold, a non-interest-bearing asset, more attractive compared to other investment options like bonds.
What is starting to concern some investors is whether or not some of these tech companies that have gotten stretched can in fact live up to the "lofty valuations"
Kenny Polcari, Kace Capital Advisors
Geopolitical Tensions
The Israel-Hamas conflict is driving up demand for gold. On February 20, 2024, tensions escalated significantly in the region, prompting investors to seek safe-haven assets like gold. During periods of political and financial uncertainty, investors often turn to these assets, which are perceived as less volatile and more likely to retain their value compared to other investment options.
Weakening Dollar:
The recent decline of the US dollar index, which measures the strength of the dollar compared to a basket of major currencies, has resulted in a drop in value. This trend has been observed since late February 2024 and has made the purchase of gold more affordable for those using other currencies. When the dollar is weaker, gold is less expensive for buyers who use euros or Japanese yen, for example. In other words, gold denominated in those currencies would be priced lower due to the weaker dollar.
Central Bank and Jewellery Demand
Gold demand is also bolstered by robust buying from central banks, particularly in Asia, and from jewellery buyers in key markets like China and India. In the fourth quarter of 2023, central banks bought a net of 180 tonnes of gold, which was added to their official reserves as per the World Gold Council.
This trend of central bank buying has continued in 2024, further supporting gold prices. Moreover, the demand for jewellery in significant markets such as China and India is still robust, especially as the approaching festive seasons draw near.
Parallels with the Crypto Market:
Some analysts draw parallels between the current gold rally and the recent surge in cryptocurrencies. Both asset classes can benefit from safe-haven demand and speculation. However, it is crucial to note that gold boasts a much longer history and established role as a store of value compared to cryptocurrencies, which are still relatively young and more volatile.
Looking Forward: A Balancing Act
The future trajectory of gold prices remains uncertain. While the near-term outlook seems positive due to the factors mentioned above, some analysts warn of potential headwinds. If inflation continues to recede and the Federal Reserve resumes raising interest rates, the gold rally might lose momentum. Additionally, unforeseen geopolitical events or significant changes in investor sentiment could also impact the price of gold.
Despite concerns, investors are optimistic about gold's long-term prospects. It's a crucial component of a diversified portfolio, offering protection against inflation, geopolitical risks, and other market uncertainties. Gold is a safe-haven asset in times of turmoil, and its unique characteristics attract interest from investors navigating an evolving global landscape.