The price of gold is up 17.20% for the year so what is the cause of this massive increase in the price? In this article we discuss the factors which can cause the price of gold to go up.
High inflation
Gold is considered a safe haven, so in times of high inflation, investors flock to gold as a store of wealth. Inflation is still above the central banks’ targeted levels. Hence gold can be used as a hedge against inflation.
Uncertainty
The demand of gold increases when there is uncertainty caused by political conflict. The Israel-Hamas conflict may have increased demand for gold as investors look for a safe haven to protect their wealth.
Interest rates
The market is expecting the Fed to stop hiking interest rates and start cutting rates in 2024.
There tends to be an inverse relationship between interest rates and gold. When interest rates go down, investors will rotate out of high yield asset classes and into gold.
When interest rates are high, investors are more likely to put their money in assets which are interest bearing to take advantage of the high interest rates.
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Low US dollar
The US dollar has been falling recently with the market expectation that the Fed are done with their rate hikes and may begin to cut rates in 2024. Therefore, foreign investors may look at other currencies to invest if they expect the interest rate to decrease. This can decrease demand down for US dollar and this is reflected in a lower exchange rate.
A lower US exchange rate is a positive for gold prices as gold is priced in US dollars. When the US exchange rate is lower, this means more gold can be purchased as the currency is weaker. This drives up the demand of gold and the gold price.
Central Banks
There have been numerous central banks buying up gold to protect their reserves against high inflation. The top three counties buying gold in 2023 were China, Poland and Singapore.
Lauren Hua is a private client adviser at Fairmont Equities.
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