As a traditional safe-haven asset, the price trend of gold has always attracted the attention of investors and ordinary people. Recently, the price of gold has continued to rise, hitting new highs repeatedly, which has aroused widespread attention and heated discussions. What is the reason for this? Where does the price of gold go from here? Let's find out.
Factor 1: Expectations of a rate cut by the Federal Reserve
Gold prices often have an inverse relationship with interest rates. When interest rates fall, the attractiveness of holding fixed-income assets such as bonds decreases, and gold, which has a store of value, gains the favor of investors.
Recently, the US inflation data has been mixed, raising expectations for a Fed rate cut in June. On the one hand, the consumer price index (CPI) in March reached an annual rate of 3.5%, a new high in the past six months, indicating that the general pone is still stubborn; On the other hand, the Producer Price Index (PPI) data came in slightly lower than expected, easing investors' concerns that inflation will not cool down.
Against this backdrop, the market is beginning to widely expect the Fed to begin its rate cut cycle in June. This expectation drove the dollar and US Treasury yields lower, which in turn provided impetus for gold to rise. Cavatoni, a North American market strategist at the World Gold Association, said that the reason for the rise in gold prices is that many investors have gained confidence from the news that the Federal Reserve is going to cut interest rates.
There is also a certain fragility to this expectation. As long as there is volatility in US economic data, it could undermine the market's confidence in the Fed to cut interest rates, causing gold prices to retreat. Just on Wednesday, gold prices retreated after the US CPI data for March was higher than expected.
Factor 2: Geopolitics drives safe-haven demand
In addition to interest rates, geopolitical turmoil is also an important factor driving gold prices. As a traditional safe-haven asset, gold tends to be sought after in turbulent times.
The war between Russia and Ukraine has dragged on, and Ukrainian President Volodymyr Zelensky has signed a bill to lower the country's conscription age from 27 to 25 years old to expand the number of troops that can go to war. Tensions between Iran and Israel could also exacerbate the turmoil in the Middle East.
According to a commodities report from ING, safe-haven demand is expected to continue to support gold prices due to geopolitical risks and uncertainties such as the U.S. presidential election at the end of the year.
Factor 3: Central banks and investors increased their holdings of gold
In addition to the above two factors, global central banks and investors' holdings of gold are also important drivers of gold prices.
Since 2004, developed countries such as the United States, the Eurozone, and Japan have adopted accommodative monetary policies in order to stimulate economic growth, resulting in a significant increase in currency issuance. Against this backdrop, the price of gold, as a store of value, has also risen.
In recent years, global central banks and investors have held demand for gold higher as inflation expectations have risen and geopolitical risks have intensified. It is estimated that the price of gold has risen by more than 600% since the turn of the century.
Jo Harmendjian, portfolio manager at Swiss private bank Tiberius Group AG, said: "Gold is the answer to many of the questions right now – whether it's inflation, interest rate cuts, or the uncertainty of a costly war. ＂
There is divergence in the future direction of gold prices
While there are a number of factors driving gold prices higher, market participants are divided on what the future holds.
Some divisions believe that gold prices have been overhyped after surging to record highs and that a pullback could occur in the near term. Bart Melek, global head of commodity strategy at TD Securities, said it may be too early to say that the Fed is pivoting to cutting interest rates, and that the "drying up" of gold prices after hitting record highs is hitting gold prices.
However, there are also those who are optimistic about the future prospects of gold prices. Kelvin Wong, senior marketer at Oanda Asia Pacific Pte Ltd., warned of short-term correction risks for gold prices, but also noted that a wider range of factors, from the wave of gold purchases by governments and central banks to geopolitical uncertainty, are supporting the strength of gold prices.
The factors affecting the price of gold are complex, and investors need to pay close attention to the changes in various aspects and carefully judge the future trend. However, in the long run, gold, as a traditional safe-haven asset, will not shake its important position.