The price of this gold metal is increasing not because of a single cause, rather, it is the combination of various factors. It is considered a safe asset during market turbulence as it protects the wealth against depreciation. Since the start of the year, gold has been on an impressive upward trajectory. Many analysts believe that different factors can contribute to further increases in gold prices in the coming months. There is no doubt over the past years, gold has offered lucrative returns, but still, there is a question of what precisely is driving this surge.
Economic Uncertainty
This term refers to a period when there is uncertainty in the economy due to various reasons such as political instability, recession and financial crises. These circumstances affect the investor’s confidence, which results in a slowdown of the economy. During these times when the economy is unpredictable, investors look for safe options for their assets. Gold is typically considered a haven, which increases the demand for gold and increases its prices.
Risk of Financial Sanctions
The risk of financial sections is the primary reason for central banks of developing economies to hold this precious metal, as seen in the past the freezing of Russian assets after the Ukraine invasion. Central banks of emerging economies are increasing their gold reserve due to economic uncertainty and also to diversify their holdings.
Fluctuations in Major Currencies
The US dollar has an inverse relation with gold prices. If the US dollar weakens, the prices of this precious metal will surge, and if the US dollar value gets stronger, it results in a drop in gold prices.
Inflation
Gold is considered as a hedge against the increase in inflation. The purchasing power of the currency decreases when there is an increase in inflation. These circumstances urge the investor to look for safe and stable options like gold to park their wealth. This increase in demand pushes the prices of this precious metal. Historically, gold is considered a protective asset against rising inflation.
Geopolitical Tensions
Geopolitical tension increases the uncertainty in the global market, so they have a big impact on gold prices. As gold is always considered a haven for investors during wars or trade disputes, there is a surge in gold demand. In uncertain economic conditions, investors see this precious metal as a secure option for their wealth that drives up its value. For instance, China-US trade disputes or the Russia-Ukraine war have led to an increase in the prices of this precious metal. In addition, things that boost the demand are sanctions or regional conflicts. So, in short geopolitical tensions drives the gold demand and prices. After Russia launched its largest air strike on Ukraine, it did a lot of damage to the country’s power system. America approved Ukraine’s use of US-supplied missiles, increasing the uncertainty on the geopolitical front. Investors buy gold in times of uncertainty, which can lead to a price increase.
Cuts in Fed Rate
Monetary policy Influences the price of this yellow metal. If there are high interest rates, the investor will park their wealth in bank deposits to yield interest. Contrary, if interest rates are lower, investors look to invest in gold to hedge against inflation. Recent cuts in the fed rate play a vital role in supporting gold prices.
Supply Constraints
Gold is a finite metal. It is estimated only 20 percent of gold is left to be mined. The yellow metal that we are getting from the mine is not enough to meet the demand. Fewer supplies can push the precious metal prices further. Seasonal demand during the wedding seasons and festive in the South Asia region also spikes the prices.
US Debt
Policymakers are concerned about the US debt sustainability, which is 124% of of US GDP. As a result, policy makers of central banks are more reliant on gold as compared to the US dollar.
Conclusion
The increase in gold prices is a combination of geopolitical tension, economic uncertainty, inflation and fluctuation in major currencies. During the period of instability, investors see gold as a haven for assets. Low interest rates from the central banks further surge its prices. An increase in demand in sectors like technology and jewelry and limited supply from mining is another factor. If the factors mentioned above remain at play, gold prices are expected to remain high.