Sunday, May 19, 2024

Gold Rush as Metal Holds Onto Its Shine: What’s Behind the Surge?

Gold has surged by 14% year-to-date, outpacing the S&P 500’s 10% rally. Gold futures peaked at an all-time high of $2,413 per ounce on April 19, while spot gold reached a fresh peak of $2,392 per ounce on the same day. After a two-week retracement, the precious metal’s price rebounded swiftly, rising by $60 per ounce to surpass $2,360 on Monday. Notably, gold was just above $1,800 per ounce at its recent lows in early October 2023.


Gold as a Safe Haven in Unsettled Times

Gold is typically favored during uncertain times, such as financial crises, war, and high inflation. Investors hold gold to preserve value and hedge against economic downturns. Traditionally, gold prices negatively correlate with the US dollar, rising when the dollar weakens and falling when it strengthens. In late 2023, speculation about potential interest rate cuts by the US Federal Reserve led to a downturn in the dollar, driving up gold prices.


However, this year, both gold and the US dollar have risen simultaneously, a notable departure from their usual inverse relationship. This uncommon alignment is attributed to the heightened military conflict in the Middle East, which increased demand for safe-haven assets in April. Additionally, increased central bank gold reserves and strong retail investor interest have driven the price surge.

Central Banks’ Gold Reserves

According to the World Gold Council, central bank purchases have significantly driven gold prices in recent quarters. Central banks’ demand for gold surged to 23% of total demand, up from an average of 10% over the past decade. The US remains the largest holder of gold reserves, while Turkey and China saw the largest increases, with 30.12 tonnes and 27.06 tonnes added, respectively, in the first quarter.

The top six holders of gold reserves are the US, Germany, Italy, France, Russia, and China, with the US holding 8,133 tonnes compared to Germany’s 3,352 tonnes.

Robust Demand from Individual Investors

Strong demand from individual investors, especially in Chinese markets, also contributed to the surge in gold prices. Over-the-counter (OTC) investments were a significant factor, with demand for bars and coins in China increasing by 68% year-on-year in the first quarter. This surge is partly due to the devaluation of the Chinese yuan and economic uncertainties, prompting investors to preserve wealth through gold. Seasonal demand spikes during the Chinese New Year may have further boosted demand.

Speculative purchases by retail investors, who tend to buy during rallies, have also driven up gold prices, despite outflows from gold ETFs in the first quarter. The fear of missing out (FOMO) effect among smaller investors has likely played a role in the continuing price rise.

Potential for Further Increases

If the US Federal Reserve cuts interest rates, the negative correlation between gold and the US dollar may reassert itself, potentially boosting gold prices. A softer dollar would make gold cheaper for other currencies, enhancing liquidity and driving up prices. However, individual investors should be cautious about potential market hype surrounding gold.

The US is set to release the monthly CPI data for April this week, a critical gauge for the Fed. Persistent inflation could cap gold price gains, as higher-than-expected CPI data may strengthen expectations for “higher-for-longer” interest rates, bolstering the US dollar.


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