analysis
The price of gold has risen to an all-time high. There was no direct trigger for the price jump. But why is gold more expensive than ever?
Gold is more expensive than ever in its history. Yesterday, the price of one troy ounce of the yellow precious metal jumped to $2,414 on the London Stock Exchange, surpassing the previous record high from December. The gold price also reached an all-time high in euros at 1,974.
It is the culmination of a remarkable rally. In the past three years, gold has only managed to peak above $2,000 for a short period of time. But since mid-December, the yellow precious metal has hardly fallen below the psychologically important mark.
Interest rate hopes as a price driver for gold?
Particularly noteworthy: There was no obvious, direct trigger for the recent price jump. Market observers and investors alike are puzzling: What are the reasons for the record high? One explanation that is often given is speculation about interest rate cuts in the USA.
Interest rates are likely to fall later and less sharply than originally hoped – but they will fall. Commerzbank raw materials expert Thu Lan Nguyen, for example, argues: “The US Federal Reserve will probably only start lowering its interest rates later, but the interest rate cuts are not over.”
Why the price of gold (mostly) depends on real interest rates
In fact, gold developments in the past depended primarily on the development of US interest rates, or more precisely: real interest rates. To put it simply, the real interest rate is the nominal yield on ten-year US government bonds minus the inflation rate.
Rising real interest rates make gold, which itself does not generate any interest and does not pay dividends like a stock investment or rent like a real estate investment, less attractive. The logic behind it: Anyone who buys a gram of gold today will only own one gram of gold in 100 years. This basically speaks against gold as a form of investment. Conversely, a bullish gold price is typically accompanied by a fall in real interest rates.
It is all the more surprising that the most recent gold rally since autumn last year has largely taken place with rising and clearly positive real interest rates. The US real interest rate is currently at just under two percent, roughly at the level of summer 2023 – it is a long way from its record low of over minus one percent.
Central banks are increasingly buying gold
There must be more to the gold price rally than speculation on falling interest rates. The industry organization World Gold Council (WGC) points to the great interest of central banks in the precious metal. Recently, the central banks’ buying series has continued at the highest level.
“Last year, demand reached 1,037 tonnes, the second highest level on record, just 45 tonnes below the previous year,” said the WGC. The organization recorded unusually high gold purchases from China, followed by Poland, Singapore, Libya, the Czech Republic and India.
Gold as a safe haven?
According to experts, the geopolitical risks in the Middle East and Ukraine and more recently in the Red Sea are important drivers of gold demand. They point to gold’s image as a “safe haven” for investors. From this perspective, the rising price of gold is also a sign of an increasingly uncertain world.
If one follows this perspective, Donald Trump’s recent success in the Republican primaries in the USA could also have contributed to the gold price’s record high. After all, quite a few economists expect a resumption of the trade war between the USA and China if the ex-president is given a second chance by US voters.
Bitcoin also at a record high
The argument for gold as a “safe haven” is also supported by the almost simultaneous rise in Bitcoin yesterday afternoon to an all-time high of over $69,000. Many investors see cryptocurrency as an investment opportunity to protect themselves against crises in the world and on the financial markets.
Still has gold Upside potential?
As far as the future prospects for the yellow precious metal are concerned, experts point to the many uncertainties regarding the Fed’s future interest rate policy. So not even the targeted first interest rate cut in June is in the clear. Against this background, raw materials analyst Nguyen is convinced: “A slight downward correction in the coming days due to profit-taking would not be surprising.”
So will gold’s strength soon be a thing of the past? This is not necessarily to be assumed. Since the West’s sanctions against Russia, the central banks of many emerging countries have been trying to become more independent. Countries such as Poland and the Czech Republic that do not belong to the euro area can also strengthen their own currencies through gold purchases. This is likely to keep central banks’ interest in gold high.
But a lot will also depend on how the major sources of conflict in the Ukraine and the Middle East develop. Against the backdrop of a possible new trade war between the USA and China, the outcome of the US presidential election is also likely to influence the future of the gold price.