Why Gold Prices Are At Record Highs

From central banks to Costco shoppers, everyone is purchasing gold these days. Spot gold touched $2,364 per ounce on Tuesday, following seven consecutive sessions of record highs and trading at $2,336 per ounce on Monday. Year on year, gold is up 16.5%.

Investors who expect the Federal Reserve to lower its benchmark interest rate are the primary drivers of price increases, but other factors, such as central banks buying gold, headed by China, to reduce reliance on US currency, are also contributing.

Why Gold Prices Are At Record Highs

Central banks view gold as a long-term store of value and a haven during periods of economic and international crisis.

Gold is regarded as a reliable investment. When interest rates fall, gold prices often climb, as bullion becomes more tempting than income-paying assets such as bonds. Investors also view gold as a hedge against inflation, anticipating that it would preserve its value as prices rise.

According to Reuters, the People’s Bank of China purchased gold for the 17th consecutive month in March, adding 160,000 ounces to its stockpile of 72.74 million troy ounces.

According to a UBS research note dated April 9, central banks may wish to “diversify away” from the US currency and acquire it in the face of geopolitical instability. Demand drives up prices as China expands its reserves, which traditional investors have already increased.

According to a Capital Economics research report published on April 9, Chinese investors are looking to gold as an alternative asset due to recent downturns in property valuations and equity prices.

Other central banks, including India and Turkey, are expanding their reserves. According to UBS, India’s GDP growth is fueling these acquisitions.

A sign of the times?

According to Ulf Lindahl, CEO of Currency Research Associates, central banks’ appetite for gold indicates a declining reliance on the dollar.

Lindahl said in an email that dollars are becoming increasingly undesirable to central banks seeking to reduce their economic dependency on the United States.

According to a March JP Morgan research note, nations not allies of the United States may accumulate gold to “mix away from dollars” and lessen vulnerability to sanctions.

According to the note, central bank purchases have fuelled the rise in gold prices since 2022. According to JP Morgan, gold may be entering a strong era, as central bank purchases of gold in 2022 were more than double the average annual buy over the previous decade.

The price increase coincides with US Treasury Secretary Janet Yellen’s visit to China to address financial stability in US-China relations and what Yellen refers to as Chinese electric vehicle overproduction.

Mark Zandi, chief economist at Moody’s, believes that rising oil costs threaten the US economy.

According to the UBS research report, higher oil costs are anticipated to raise inflationary fears, causing gold prices to rise.

The typical view of gold
The spike in gold prices indicates that investors expect the Fed to drop interest rates later this year, but they may be concerned about the prospects of containing inflation without causing the US economy to enter a recession, sometimes known as a soft landing.

According to an April 9 research note from UBS, the prospect of Fed rate cuts remains the primary driver of optimistic sentiment toward gold.

Fed Chair Jerome Powell said in remarks on April 3 that inflation remains on a “sometimes bumpy path” toward the Fed’s 2% target and that rate cuts to rebalance the economy are expected to begin later this year.

According to CME Group data, 51% of investors currently predict a quarter-point decrease in June. However, employment growth in March exceeded projections, casting doubt on the need for numerous rate reductions in an economy that remains strong.

The Personal Consumption Expenditures price index, the Fed’s favored inflation gauge, increased 2.5% in the year ended in February. According to Department of Commerce figures issued this month, this represents a little uptick from the 2.4% increase in January.

The core PCE price index, which excludes the more volatile food and energy sectors, increased 0.3% monthly. Fed officials consider the index a key indicator of underlying inflation, and it fell from 0.4% in January when it increased at the strongest rate in a year.

So, why is gold soaring right now?

Some investors are buying into the frenzy around gold bullion as prices increase, pushing them further. On Reddit, proud buyers frequently create threads touting their collections.

Costco started selling bars online in August and silver coins in January. Wells Fargo estimates that the corporation currently sells up to $200 million in gold and silver per month. Chief Financial Officer Richard Galanti told analysts in December that the company had sold over $100 million in gold bars in the previous quarter.

The investment note, released on April 9, stated, “The accelerating frequency of Reddit posts, quick online sell-outs of product, and [the company’s] robust monthly eComm sales suggests a sharp uptick in momentum since the launch.”

Lindahl stated that “trend followers” and others capitalize on price increases as the long-term trend indicates much higher costs.

It’s also worth mentioning that gold has historically been a haven during political turmoil. Voters in almost 60 countries, including the US presidential election, will go to the polls this year. The increase in geopolitical and economic volatility highlights the value of precious metals.

SOURCE – (CNN)