Ritika Janiya
Indeed, gold has been one of the most favorite investments for years, but over the past couple of years, it has shined brighter than ever. Gold prices touched a record high on Monday because of a mix of global events and changes in central bank policies. The price of gold rose 0.4 per cent, coming in at $2,732.45 per troy ounce during early trading in London. That represents an astonishing jump of 40 per cent in the past year alone. What’s behind this humongous rush? Let’s break it down why, in simple terms.
What’s Behind the Gold Rush?
Several things are happening in the world that push people into investing in gold. One big reason is that there are geopolitical tensions, especially in the Middle East, but not only there. Conflicts often create uncertainty, and uncertainty scares investors. Gold is perceived to be one of the safe havens during such tumultuous times. In simple words, when it gets tough, people invest their money in gold because they think that is stable, and worth something.
Interest rate cuts, for instance, are another significant factor as to why gold is seeing growing popularity. Most of the world’s central banks have cut their interest rates. However, low interest rates tend to boost the demand for gold generally. This is because gold pays no interest or dividend, implying that the opportunity cost of holding gold falls if interest rates are low. Put simply, the more that individuals have to lose from foregone interest on other investments, the more they tend to buy gold.
Middle East Tensions and the US Election
The war in the Middle East is creating a lot of uncertainty. Investors fear that this war may spill over or even destabilise further, causing them to seek safer havens, such as gold. The second factor adding further uncertainty is the US presidential election. Vice President Kamala Harris and former President Donald Trump are facing off in the race, and the race seems to be quite close. The unpredictability of the contest has scared people further towards gold.
Surprisingly, optimism prevails over gold, as Joni Teves, a precious metals strategist at UBS, recently sounded positive. She had been thinking that the prices could actually get as high as $3,000 per troy ounce next year. According to her, however, there is still much room for growth in holdings by investors in gold and could well mean even higher prices in the coming months.
Buying Big by Central Banks
One of the surprising drivers behind rising gold prices is that central banks are actually buying a lot of them. They bought 483 tonnes in the first six months alone this year, according to reports from the World Gold Council. Why do they want to buy so much gold? Many of them are looking to diversify their reserves. Traditionally, they kept a lot of US dollars in reserve, but with all the uncertainty in global markets, they’re looking to gold as a safer bet.
Despite the high prices cutting demand for physical gold at one of its biggest buying sources-China, the strong buying by central banks has more than made up for that.
How Interest Rates Play a Role
Another major reason the gold price has risen is because of interest rates. Most of the world’s central banks, with the exception of the US, have reduced interest rates in an effort to strengthen the economy. When interest rates are low, it makes borrowing money cheaper, and individuals and businesses spend more. But for investors, low interest rates can result in less gain for bonds and lower returns on savings accounts. In the case of gold, it doesn’t earn interest; therefore, when other investments aren’t doing much, it’s a rather attractive investment.
The US Federal Reserve, the country’s central bank, is widely expected to discuss more interest rate cuts in their meeting that is scheduled for November. The gold market is kind of excited by this news because historically, people have found that lower rates typically produce higher gold prices.
Investors Rushing to Gold
It is not just the central banks buying gold. Averaging around 18 tonnes monthly, individual investors are pouring money into the yellow metal since summer. There have been five consecutive months of global inflows into gold-backed exchange-traded funds, which permit investors to buy gold without actually needing to store it. Taking this into account, demand for gold-backed ETFs is increasing constantly, and, consequently, so does gold.
Risk of fiscal instability, quite a few countries are in debt and other financial difficulties. People want to invest their money in gold,” said Ole Hansen, Saxo Bank head of commodity strategy. “Also, central banks want to diversify their investment portfolio away from the US dollar, so also the price of gold goes up,” added Hansen.
Not Just Gold Benefiting
It’s not just gold that benefits from this uncertainty. Silver is also soaring to almost 12-year heights. One of the reasons for this is that, just as with gold, silver is an investment of preference for these uncertain times. But, unlike gold, silver has an industrial use. It is used in the electronics’ production and also in solar panels, so its price is subject to the world’s supply and demand for those products as well. Apart from the rising price of gold, a tight supply of gold and a rise in the exchange rate remain the other essential factors that fuel up the price of silver.
What’s next for Gold?
Indeed, heading to the US presidential election and as tensions remain high in the Middle East, gold is likely to be a “safe haven” continued choice of investment for investors. And specifically, with the uncertainty surrounding election outcome, there will be some wild price swings for gold in the coming weeks, concludes Joni Teves, who believes that we can expect some “choppy price action” as investors respond to election outcomes and events in global conflicts.
Most analysts are saying, in their research, that the future’s prospects of gold prices will be higher. Low interest rates alongside rising geopolitical tensions and central bank demand all support a gold bull case. Whether it will or not breach the $3,000 level next year – according to some analysts’ predictions – is unsure, but gold clearly has been in huge demand lately, and the price is not going to come down anytime soon.
