What is pushing the price of gold to record highs?

Investors are adopting a buy-and-hold approach rather than selling the precious metal for profit

A jewellery story in New York. The price of gold has been boosted by optimism that US interest rates have now peaked. Getty Images
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Gold is the world's oldest store of value and primary safe-haven asset class, so when the price rockets, that’s usually a bad sign.

It usually signals anything from war to inflation to a pandemic, a stock market crash, or a combination of all these.

Gold is on a roll right now, recently hitting a record high of $2,144 an ounce, so how worried should we be?

The answer is not too much, because for once the gold price isn’t being driven by fear but greed. Or, to use another word, optimism.

This isn't normal. In 1979, when Iran seized US hostages and Russia invaded Afghanistan, the gold price tripled in six months, peaking at $850 an ounce in January 1980.

The gold price soared during the global financial crisis, again during the eurozone crisis of 2011 and also during the Covid pandemic. It hit its previous high of $2,074.20 in August 2020.

When markets panic, gold rises. That's a crucial reason why investors hold it. It softens their losses on equities.

Yet, Jason Hollands, managing director of Bestinvest by Evelyn Partners, says today's gold price increase is not a sign of panic. “It's happening at a time when equities have also been rallying hard.”

Gold has been boosted by “an outbreak of optimism that US interest rates have now peaked as inflation continues to fall, raising hopes that rate cuts are coming our way next year”, Mr Hollands says.

Ricardo Evangelista, a senior analyst at ActivTrades, says a growing number of analysts now believe the US Federal Reserve will deliver the first-rate cut as early as March while cautioning that “this is not a majority view yet”.

“With inflation decreasing faster than predicted and the economy cooling, the planets are aligning for a rate cut within the first half of 2024,” he says.

Gold doesn’t pay any interest or dividends. This makes it less attractive when returns from rival safe-haven asset classes like cash and bonds are rising,

Yet, as interest rates peak and US Treasury yields decline, the “opportunity cost” of holding non-interest-bearing gold also falls, making it more attractive.

Expectations of a Fed rate cut have also weakened the US dollar, in another boost for gold. That’s because it is priced in US dollars and a softer dollar makes it cheaper for buyers in other currencies, notably major gold markets China and India.

Mr Evantelista expects the dollar and US Treasury yields to soften further, “in a dynamic that may create scope for further gains for the precious metal”.

He notes that the gold price is trading steadily around the $2,000 mark, “which is becoming a significant support level”.

There are other factors supporting gold. China and Russia have upped purchases after seeing the US freeze Russian foreign currency reserves held overseas as punishment for the invasion of Ukraine. Washington can’t touch physical gold held in domestic vaults.

The Israel-Gaza war has also brought out the buyers, as have tensions between Yemen and the US. The rise in the recent respiratory illness cases in China has also contributed to the rally in gold.

So, that’s why the gold price is rising. The next question is how high it can go?

Adrian Ash, director of research at BullionVault, notes that while gold has many buyers today, few are selling.

To his surprise, most seem to be adopting a buy-and-hold approach rather than selling to profit from today’s high price.

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Many are holding because they see trouble ahead.

“The rising floor beneath gold prices should continue to strengthen as investors look ahead to 2024 and see a growing risk of recession, continuing war in Ukraine, potentially worsening conflict in the Middle East, plus divisive elections in the US, India and UK,” Mr Ash says.

Emma Wall, head of investment analysis and research at Hargreaves Lansdown, warns that gold looks expensive at today’s levels and investors should not assume the price will continue to rise.

“However, it is likely to remain high due to record peacetime government debt levels and heightened geopolitical tensions,” she says.

Ole Hansen, head of commodity strategy at Saxo Bank, sees gold potentially rallying to $2,300 in 2024.

“The level will ultimately depend on demand from central banks, who bought gold at a record pace in both 2022 and 2023, and whether exchange-traded fund investors will return to gold after being net sellers since early 2022,” Mr Hansen says.

At the time of writing, gold has sold off from its recent record high, falling to about $1,996, as traders question whether they moved too fast with their interest rate assumptions, says Vijay Valecha, chief investment officer at Century Financial.

The rising floor beneath gold prices should continue to strengthen as investors look ahead to 2024
Adrian Ash, director of research at BullionVault

“From a technical standpoint, achieving a daily close above the psychological barrier at $2,050 is crucial if the uptrend is to resume,” he says.

“The next hurdles are at $2,075 and $2,100. A sustained move beyond this level will pose a challenge to the all-time highs of $2,144.”

There are also downside risks, he adds. If the price dips below $2,000, gold could potentially decline at a faster pace.

Yet for now, gold shines and there are good reasons to expect that to continue, Mr Valecha says.

“A recent survey by the World Gold Council showed that 24 per cent of central banks plan to boost their gold reserves in the coming 12 months, amid a rising lack of confidence in the US dollar as a reserve asset.”

Investors can play the gold price by buying jewellery or bars, or the stocks of mining companies through a specialist fund such as BlackRock Gold & General.

Many prefer to track the gold price via an exchange-traded commodities (ETCs) fund such as iShares Physical Gold ETC or Invesco Physical Gold.

Costs are low and these funds buy physical gold bars to back their holdings, rather than using derivatives and other measures to track the price.

Despite its reputation as a haven, the gold price can be volatile. After hitting $850 in 1980, the price crashed to $200 and stayed there for more than two decades.

Private investors should never put more than 5 per cent or 10 per cent of their entire portfolio in gold, as a diversifier. Remember, shares are also increasing.

Updated: March 13, 2024, 8:50 AM