- Gold prices reached an all-time high of $2,135 per ounce on Monday, driven by expectations of interest rate cuts, a weaker dollar, and geopolitical tensions.
- Lower interest rates make gold more attractive as a non-yielding asset, and a weaker dollar makes it less expensive for international investors to buy gold.
- Central banks in emerging markets have been buying gold at a rapid pace, with purchases potentially continuing for years or decades.
Gold prices hit an all-time high on Monday, reaching $2,135 per ounce, before falling to trade at $2,023 by 11.57 a.m. ET.
This surge in gold prices is due to growing expectations of interest rate cuts among investors, a weaker dollar, and geopolitical tensions.
Investors have become increasingly confident that the US Federal Reserve has successfully reined in inflation through aggressive interest rate hikes and may start to cut borrowing costs as early as March next year.
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Lower interest rates make gold more attractive as a non-yielding asset, as demand for US Treasuries decreases. The yield on the benchmark 10-year US Treasury bill has fallen from a 16-year high of 5% reached in mid-October to 4.3% on Monday.
Daria Efanova, head of research at broker Sucden Financial, wrote in a note Monday, “The expectations of the end of the tightening cycle have been priced in, pushing longer-term yields lower. This has created a more favorable environment for gold as a non-yielding asset.”
John Reade, a market strategist at the World Gold Council, said in an interview that gold prices could “quite possibly” shoot above Monday’s record high, with investors predicting several rate cuts over the next year.
These rate predictions have also weighed on the US dollar, making gold more appealing. The dollar slumped 3% last month against a basket of six major currencies.
Since gold is priced in US dollars, the fall in the greenback’s value has made it less expensive for investors outside the United States to buy the metal, which should have boosted demand and, in turn, lifted gold prices.
Gold has also benefited from a deep sense of global unease, with JPMorgan CEO Jamie Dimon stating that this may be the most dangerous time the world has seen in decades. Investors typically see gold as a safe haven since it is a tangible, scarce asset that holds its value. Gold prices have risen 10% so far this year.
Reade said, “The geopolitical risk environment appears to have changed. Not just (because of) Russia invading Ukraine, not just the terrible things going on in Israel and Gaza, but trade tensions between the US and China, concerns about what will happen in the South China Sea, concerns about what China will do in Taiwan.”
Central banks in emerging markets have been stocking up on gold, with policymakers in those countries seeing it as a safer alternative store of value.
According to the World Gold Council, central banks in emerging markets bought 473 metric tons (521 tons) of gold a year on average between 2010 and 2021.
However, last year they bought 1,100 metric tons of the metal, and in the first three quarters of this year, 800. Reade said that this breakneck pace of purchases “could continue for years, if not decades.”
In a survey published in May, close to a quarter of all central banks said they planned to increase their gold reserves in the next 12 months.
Victoria Scholar, head of investment at Interactive Investor, said in a note, “Concerns about the shaky global economic backdrop and the Israel-Hamas conflict have fueled investor demand for safe-haven assets like gold. Plus, expectations for Fed rate cuts next year have put downward pressure on the US dollar… adding to gold’s attractiveness.”
Clear Thoughts (op-ed)
Gold prices reached a record high of $2,135 per ounce, showcasing the growing instability of our global economy.
Lower interest rates and a weaker dollar make gold an attractive non-yielding asset for international investors.
Emerging market central banks are buying gold at an alarming pace, indicating a lack of trust in traditional financial systems.
Geopolitical tensions and trade wars further fuel this gold rush, as investors seek a tangible safe haven.
It’s time to ask ourselves: what does this gold frenzy say about the state of our world? The answer is clear – uncertainty and fear are driving the markets, and we must find a way to restore confidence and stability.
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