Reasons for and responses to soaring gold prices

2024-05-02
Summary:

A gold price surge causes market turbulence. Investors analyze reasons like Fed policy and global central bank gold purchases and take risky measures.

Recently married people who buy gold headache because the gold store gold jewelry has 700 dollars a gram. And internationally, the price of gold is also surging past $2100 an ounce. Not only hit a record high, but also a new high a day. Not only do investors feel tricky, but ordinary people are full of worry. After all, it's all about the gold of the chaos; the price of gold is on the rise, letting people worry about international security issues. Accordingly, let's talk about the reasons for the surge in gold prices and the response.

Gold Price ChartGold price fluctuations in the history of the reasons

Throughout the recent history of gold, mankind has entered the era of credit money, that is, when the dollar was announced and gold decoupled. Anytime gold has risen massively in this 50+ year period, it has been a direct manifestation of the declining power of the United States. In addition to this, of course, supply and demand factors, geopolitics, etc. are also important reasons.


For example, on August 15. 1971. when the dollar was announced and gold decoupled, the price of gold was $35 an ounce. By 1973. it had exceeded $100. which was the world's most direct response to the U.S. breach of trust. The United States abandonment of its commitment to use gold as a currency reserve triggered the international community's confidence in the dollar.


Investors began to question the value of dollar holdings and turned to other assets, including gold. This led to a rapid rise in the price of gold, reflecting the market's concern about the loss of confidence in the United States. But then the U.S. found the value of the dollar to fall back on, namely oil.


Therefore, the price of gold in the first and second oil crises in the middle of the performance of a reasonable. Because the United States can control the dollar settlement of oil, it naturally represents the strength that remains. By 1978. the price of gold was up to 250 dollars and had risen more than twice. But the same period of oil rising 10 times, compared to the increase in gold, seems very normal.


But in 1979. which is not normal, gold quickly rose to 500 U.S. dollars. 1980 in January was crazy for how much 850 U.S. dollars. More than a year's time has tripled; it must be the United States out of the problem; it will be so. At the same time, there was a major inflation problem in the United States, with the inflation rate reaching 14%. And at that time, when the unemployed population exceeded 7%, the chairman of the Federal Reserve, Volcker, raised the federal funds rate to 20% in one breath, only to put a stop to inflation.


Since then, gold and the United States of America's national luck have been labeled this way. As long as the United States of America's good fortune continues, that gold will fall. Conversely, as long as the United States has bad luck, the harder it is, the more it declines. For example, in the 1980s, after the great inflation control, gold also fell. 1984 U.S. GDP growth rate of 8%, the economy is a good mess, and the price of gold fell to the bottom in 1985. about 300 U.S. dollars.


Since then, the price of gold has been choppy and very flat all the time, at about three or four hundred dollars. During the period, a lot of big events occurred: the United States and the Soviet Union confrontation, the collapse of the Soviet Union and then the Gulf War, the birth of the euro, the financial crisis in Southeast Asia, and even in the United States when the terrorist attacks on 911 and the price of gold did not rise. In 2001. when the price of gold fell below $300. the only reason was that the United States was too strong.


In the mid- to late-80's, the US economy had been doing very well. The Cold War had actually been won or lost, and throughout the 1990s, the US was as strong as ever. The Gulf War proved that the U.S. had the power to take on the world single-handedly, so gold couldn't have gone up. Even if the U.S. mainland was attacked on 9/11. no capital will feel that the United States will be knocked down; they simply cannot think of using gold to hedge.


Then, in 2005. gold broke through the 20-year-long sideways and began to rise. Look back at the reason, which is clear: in 2005. President Bush declared the Afghanistan-Iraq war over. After saving the Clinton period of the Treasury from being empty, hindsight capital began to buy gold hedges.


At the same time, with the explosion of productivity in China, the world's resources were experiencing massive price increases. Iron, ore, crude oil, and coal are almost always priced to rise; gold, as a financial commodity, naturally follows the rise. These two reasons slowly pulled gold out of the sideways range, from $400 in 2005 to more than $600 in 2007.


Then gold made a small pullback in 2008 after the financial crisis and then went from $700+ to $1800+ in 2011. The reason for not stopping in the middle is also very simple: the dollar over-issuance. The result is also very simple: set up a large number of Chinese big moms and wait 10 years for their release.


This time, gold rose to $2100; the same with the United States cannot be related. After all, in the world today, the dollar is still the currency of gold, so it still has an important influence on the fluctuation of the price of gold. However, it is important to note that the price of gold is influenced by a number of factors and is not the only measure.

Gold Price and U.S. Real Interest RatesReasons for the gold price spike

Looking at the history of gold's successive rises and falls, its price has always been influenced by the United States. Changes in U.S. interest rates, for example, have had a significant impact on the price of gold. At the same time, global central bank attitudes towards gold, global economic and geopolitical factors, and the resulting demand for risk aversion will all contribute to the price volatility of gold.


First, there is the U.S. real interest rate. It is important to realize that gold is denominated in US dollars, and both gold and the US dollar are risk-free assets. But the difference between the two is that gold will not produce interest, but the dollar can. The most typical situation is to buy U.S. Treasury bonds and get a U.S. bond yield.


But although gold cannot produce interest, it can resist inflation. In contrast, the U.S. dollar depreciates with inflation, so inflation can actually be seen as a gain for gold. So in fact, the U.S. bond yield minus the inflation rate to get this real interest rate is the opportunity cost of buying gold.


The higher this opportunity cost, the higher the real interest rate in the US. Rational investors will be more inclined to sell gold to buy U.S. bonds, so the gold price will fall. Conversely, gold prices rise. Although this is only a logical analysis, based on actual historical data, the price of gold and, indeed, U.S. real interest rates are negatively correlated.


Simply put, the higher the U.S. real interest rate, the lower the price of gold, and the reverse also holds true. Many investors who want to know where the gold price is going in the medium to long term look at US dollar interest rates. Generally speaking, the gold price has the strongest correlation with the 10-year. That's why investors usually pay close attention to the movement of the U.S. 10-year Treasury yield to help them determine the movement of the gold market.


As you can see from the chart above, the gold price and real interest rates over the last year still show a highly negative correlation. Accordingly, it is reasonable to speculate that the recent surge in gold prices and the Fed's dovish signals are related. Simply put, at the March 20 interest rate meeting, the Fed decided to keep interest rates unchanged for the fifth consecutive time.


Under economic resilience and inflation stickiness, the Fed still maintains the forecast of a 75 BP rate cut for the whole year, which is regarded as a dovish statement. The dot plot also shows that Fed members generally believe that it is appropriate to cut rates this year. This comes on the heels of market concerns that the hot January-February inflation data could lead to fewer rate cuts than the market expected. In this way, the Fed is equivalent to telling the market not to worry; although inflation is still not low, it will still maintain the original pace of rate cuts.


So the news was released after the market's confidence in the Fed's interest rate cuts strengthened and the expected private interest rates minus inflation to get the real interest rate topped back down. The price of spot gold also at this time pulled up quickly, reaching the highest breakthrough of 2200 U.S. dollars per ounce, and also continued to make new highs.


But the U.S. real interest rates cannot fully explain the price of gold over the rise and fall, so we also have to look at the second factor affecting the price of gold, that is, the global central bank's attitude towards gold. Gold has been an important reserve asset for central banks; central banks in gold holdings also account for their dominant position. The gold held by central banks accounted for 17% of the total gold reserves.


And central bank buying and selling behavior in the gold market is basically common. So they have an important impact on the price of gold. For example, since 2010. when the global central banks have been continuing to buy gold, the price of gold has been higher than the average price of profit in the market.


And in recent years, the central banks, especially the central banks of emerging countries, have been increasing gold reserves; in the past two years, this trend has become more obvious. 2022 global central bank gold net purchases of 1082 tons, compared with 450 tons in 2021. increased sharply to record highs in 2023 and 2024 and continue to maintain a high level.

Global Central Bank gold purchases impact gold prices.For example, China's central bank purchased gold on a month-to-month basis for 16 consecutive months from November 2022 to February 2024. a cumulative increase of 9.94 million ounces. This is the longest period of consecutive months of central bank holdings since the data is available, indicating the continued bullishness on gold and the importance of diversified foreign exchange reserves, and this behavior has also had a certain degree of influence on the gold market.


There is also hedge demand. These years, the relationship between the two major powers, the United States and China, has deteriorated, and the risk of geopolitical conflict continues to escalate. Indeed, let many people know that the hedge attribute has a demand. After all, as the saying goes, peace antique, chaos gold well. Historically, certain crisis events and regional conflicts have promoted the rise of gold prices.


Take the financial crisis in 2008 and the new crown epidemic in 2020 as examples. These major events with wide-ranging impacts on the world have triggered instability in the financial markets to a certain extent and even led to a liquidity crunch. Or the Syrian civil war, the Libyan war, the Kosovo war, the Gulf War, or other regional conflicts will become triggers for the rise of gold prices.


According to western securities for a number of war reviews, general gold prices will rise because of the pre-war risk aversion short-term surge. Unless it is a sudden war, after the war situation is clear, gold prices will fall back. So risk-aversion is a concern. This is a concern in this article; although it will affect the gold price, the durability of this effect also needs to be specifically considered.


For example, in 2020. the outbreak of the new crown epidemic in early March around the world triggered financial market anxiety and even evolved into a liquidity crisis. In this case, both the stock and bond markets were hit, while the price of gold fell as a result, accumulating a 12.4% decline in the period from March 9th to 19th.


Then again, the Russian-Ukrainian conflict that erupted on February 24. 2022. triggered a brief rise in the price of gold, but by March 9th, the price of gold began to fall back and gave back most of the gains from the outbreak of the conflict on March 15th. Over time, the market has become less concerned about the importance of the Russia-Ukraine conflict and more concerned about its impact on the global economy.


And it is the Russian-Ukrainian battleground that remains the most visible part of today's deteriorating international political situation. Although Russia has temporarily gained some advantages, the pressure from NATO is still huge. French President Macron said that NATO members and other allies might consider deploying troops to Ukraine. And then Russia's President Vladimir Putin said attempts at a new intervention in Russia could trigger a large-scale conflict with the use of nuclear weapons.


This is a little bit better in the Middle East than the Russian-Ukrainian theater because it's not as if there's going to be a large-scale nuclear war. Then there's the southeast of China, where the Philippines and Taiwan authorities have been proactive lately, and the U.S. has sent a five-carrier fleet to East Asia to sit on the sidelines. So the tension in the international situation has also increased the trend of rising gold prices.


In addition, there are various economic powers of the stock market, which are basically at a high level. In the stock market, putting in too much money is obviously a little unsafe. After all, the world's stock market basically follows the U.S. stock market; the U.S. stock market rises, and the U.S. stock market falls. And gold rose, from another side, also shows that the big capital for high stock market concerns, for this reason to take some risk aversion measures.


In fact, the cause of the price of gold is never a single reason, but these factors are intertwined and influence each other, so that led to the price of gold fluctuating and rising. And this investor must have clear cognition only to be able to make the appropriate investment decision according to the market situation.


Responding to the Soaring Gold Prices

In the current world pattern, the price of gold and the outlook for the future of the price of gold need to consider a number of factors, including the Federal Reserve policy, real interest rates, central bank gold purchasing behavior, as well as geopolitical and so on. Therefore, investors in the gold price spike response strategy will need to be extra cautious.


And according to market forecasts, the Federal Reserve in 2024 will make interest rate cuts, resulting in a decline in real interest rates, which will provide support for gold prices in the long term. Currently, the market has reflected the Fed's expectations of multiple rate cuts during the year, so short-term gold prices will be affected by the expected game of interest rate cuts. If inflation is slow to fall back, the expectation of interest rate cuts may be affected, which will lead to a short-term decline in gold prices, but this may be a better time to buy gold.


Recent surveys suggest that central banks around the world will increase the percentage of gold they hold. This means that central bank demand for gold could increase, providing support for gold prices. And when central banks buy large amounts of gold, the demand for gold in the market increases, which pushes the price of gold up.


And 2024 is the year of general elections in over 70 countries and territories around the world, including the United States. Past experience has shown that political uncertainty can drive the price of gold higher, especially when events such as escalating trade friction with China occur. Therefore, if Trump is elected and continues to adopt a tough policy towards China, it could lead to a deterioration in US-China relations, triggering risk aversion, which in turn could drive up the price of gold.


In other words, this wave of gold's price spike is likely to continue for some time. And from historical experience, gold's big market tends to come from global fragmentation, currency dislocations, and civil unrest in the United States. Although gold is generally regarded as a safe-haven asset, whether or not it should be invested in by the average investor needs to be carefully considered.


First, one's investment objectives and risk tolerance are crucial. Second, investors need to have an understanding of the gold market and consider the pros and cons of other investment options. In addition, factors such as investment costs, liquidity, and management need to be taken into account.


In addition to gold, investors may also consider other asset classes, such as stocks, bonds, and real estate. Each asset class has its own specific risk and return characteristics, and investors should make reasonable allocations based on their personal circumstances and financial objectives.


In summary, despite the current high price of gold, investors can wait a little. The market may repeatedly play between rate-cut expectations and disappointment. If the gold price retraces due to disappointment, this may provide investors with a layout opportunity. However, investing in gold is still risky, so investors should be cautious and choose formal trading platforms and institutions to avoid unnecessary losses.

Will the price of gold go up again?
Time Possibility Reasons
Short term Medium Geopolitical tensions, inflation, and central banks buying more gold.
Medium term High Economic uncertainty, inflation, and central banks hoarding gold.
Long-term Medium Economic slowdown, tensions, and central banks buying gold.

Disclaimer: This material is for general information purposes only and is not intended as (and should not be considered to be) financial, investment, or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by EBC or the author that any particular investment, security, transaction, or investment strategy is suitable for any specific person.


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