How high can the price of gold go?

The precious metal jumped to a one-year peak last week but experts say investors should be cautious and only buy in the dips

The price of gold reached an all-time dollar high of $2,067.15 an ounce in August 2020. Getty
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Gold is back. The precious metal has jumped around 10 per cent in the past month, sending the price above $2,000 for the first time in more than a year.

This is good news for gold investors but a warning shot for everybody else, because the price typically rises in times of trouble.

It has spiked in recent weeks due to the banking crisis and growing fears that the US is falling into a recession, and gold bugs are bullish, says Chris Beauchamp, chief market analyst at online trading platform IG.

“Gold is seizing any opportunity to rally right now. It looks like its time to shine has finally arrived.”

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On Tuesday, gold was trading at about $2,002 an ounce, having slipped from its April 5 high of $2,034.29. So, where will it go next and why?

Three factors typically move the gold price. The first is the US dollar. Gold, like almost every other commodity, is priced in dollars. When the dollar is strong, that makes it more expensive to buyers in other currencies, hitting demand.

Bond yields are the second factor. Gold doesn't pay any interest, so it's less attractive when interest rates are rising and lower-risk asset classes such as bonds and cash pay more income, as happened last year.

Finally, gold demand is driven by political and economic risk. When investors are nervous, they typically seek safety in the world's oldest safe haven and store of value.

In August 2020, gold hit what is still its all-time dollar high of $2,067.15, during initial Covid uncertainty. It spiked again after Russia invaded Ukraine at the start of last year, only to collapse as the early panic eased.

The energy and inflationary shock also hit gold, as this forced the US Federal Reserve to repeatedly hike interest rates, which drove up the dollar and bond yields. Covid lockdowns in China also hit demand from that quarter.

When the US dollar peaked last October, gold hit a low of $1,638.85 an ounce, says Vijay Valecha, chief investment officer at Century Financial.

Then the market shifted and the dollar started to slide as investors anticipated the Fed “pivot” — the point at which it started cutting interest rates instead of increasing them.

Gold has enjoyed a further boost this year as the banking crisis triggered a flight to safety and recession fears grew.

Sticky inflation, rising interest rates, monetary tightening and risky credit are ripe conditions for a worldwide recession and gold resurgence, Mr Valecha says.

“The banking crisis has triggered a lending squeeze in the US that could spread to other parts of the world. This all favours gold bulls.”

Demand has been boosted by falling bond yields and fresh Chinese buying as its economy reopens, Mr Valecha adds.

The surprise oil output cut by Opec+, coupled with weak US jobs and services data last week, added to fears of an economic slowdown.

Watch: US Federal Reserve raises interest rates a quarter-point amid banking turmoil

US Federal Reserve raises interest rates a quarter-point amid banking turmoil

US Federal Reserve raises interest rates a quarter-point amid banking turmoil

“This sent the yellow metal soaring above the significant psychological threshold of $2,000. With yields falling, the dollar sliding and investor sentiment weak, the gold price has the potential to rise further,” Mr Valecha says.

Adrian Ash, director of research at BullionVault, reports a doubling in the number of people investing in gold for the first time following the banking scare, but says it’s not all one way. “Record-high prices have also spurred record profit-taking.”

The underlying gold price strength looks set to continue, as new investors, central bank buying and Asian jewellery consumers have built a rising floor beneath the market, he says.

“For existing investors, the metal is working just as they hoped, spreading risk from their wider portfolio and offering a profit to offset losses elsewhere.”

There is another reason gold is rising.

Last year saw “colossal central bank purchases”, according to the World Gold Council, with Turkey, China and Qatar particularly active, says Jason Hollands, managing director at fund platform Bestinvest.

“Western nations have frozen Russia’s foreign currency and fixed income reserves, but physical gold is much harder to control. This has boosted demand from other countries that wish to insulate themselves against the threat of US sanctions in future.”

Recent crypto controversies, such as the Sam Bankman-Fried scandal at FTX, may also have driven demand as investors put their faith in physical gold rather than its digital rival, Mr Hollands says.

Where the gold price goes next depends on whether the US falls into a recession says Carsten Menke, head next generation research at Julius Baer.

“This would lure even more safe-haven seekers back into the market and also prompt the Fed to reverse its current regime of monetary tightening.”

Yet, short-term speculative traders may have jumped the gun, says Mr Menke, who urges caution among those tempted to chase the gold price higher.

“We still believe a US recession will be avoided and that a rapid reversal of US monetary is unlikely to materialise.”

He doesn’t anticipate the US banking turmoil to spread into the broader financial system and triggering another financial crisis, and is taking a cautious view on the gold price.

“We argue that a rapid reversal of US monetary policy is unlikely to materialise, which, in turn, means that gold prices have moved too far too fast.”

If he’s right, gold may soon peak — and the process may have started.

In the longer term, peak real rates, a weakening dollar, recessionary concerns and healthy physical demand from central banks should prove supportive for gold, says Christian Abuide, head of asset allocation at Swiss private bank Lombard Odier.

Yet, he also urges caution. “Given our belief that gold prices have modestly overshot, we would await a pullback before adding more exposure.”

As with any investment, the gold price can be volatile despite its safe-haven status.

Andrew Dickey, director of precious metals with The Royal Mint in the UK, says when buying gold it is important to commit to investing over the long-term.

We argue that a rapid reversal of US monetary policy is unlikely to materialise, which, in turn, means that gold prices have moved too far too fast
Carsten Menke, head next generation research at Julius Baer

“That way you may be able to ride out any market dips and potentially give yourself a better chance of making a profit.”

Buyers can invest in physical coins and bars or get exposure to the gold price via an exchange traded fund.

If investing via an ETF, advisers typically recommend funds backed by physical gold, such as SPDR Gold Shares or iShares Gold Trust.

Some investors prefer to invest in the shares of gold miners, which may behave differently, with iShares MSCI Global Gold Miners and VanEck Vectors Gold Miners ETF both popular, as is the actively managed BlackRock Gold and General Fund.

Private investors should not be dazzled by recent gold strength, as it may not last. They should hold it as part of a balanced portfolio, and look to buy on the dips, rather than the spikes.

Updated: April 12, 2023, 5:00 AM