- The price of gold reached a new record of over $2,500 per ounce on Friday.
- Due to gold purchases by central banks as well as geopolitical and economic uncertainties, gold prices have risen by around 20 percent this year.
- Investors expect further gains in the price of gold if the Fed lowers interest rates.
The price of gold is soaring and reached a record high on Friday – and could rise even further.
A combination of factors, including active buying by central banks, has boosted the yellow metal, which is up around 20 percent this year.
In fact, prices have been on a “continuous upswing” since their low of $1,810 an ounce in October, Ole Hansen, head of commodity strategy at Denmark’s Saxo Bank, wrote in a statement on Monday.
This means that a standard-sized gold bar of about 400 troy ounces – like those found in gold heist movies – now costs over a million dollars a piece.
The spot price for gold is currently just under $2,500 per ounce and has risen by around 21 percent so far this year.
An important factor driving market expectations for a higher gold price is a possible interest rate cut by the US Federal Reserve following weaker-than-expected inflation data for July and higher unemployment figures.
Investors will be closely watching Fed Chairman Jerome Powell’s keynote speech at the central bank’s annual symposium on Friday in Jackson Hole, Wyoming, for clues about the central bank’s next steps.
“The question now is how big the rate cut will be,” wrote Daniela Sabin Hathorn, a senior market analyst at Capital.com, in a commentary on Monday.
If Powell does indeed signal a deeper rate cut – for example by 50 basis points or 0.5 percentage points – this could lead to higher gold prices.
A decline in U.S. interest rates typically depresses bond yields and the greenback, which in turn leads to investment in gold, which is internationally denominated in dollars.
In addition, a deeper rate cut would “indicate greater concerns at the central bank about an economic recession,” Hathorn wrote.
A main reason why central banks lower interest rates is to stimulate lending and thus economic activity.
Since gold is a proven store of value, its prices are likely to rise due to recession fears.
Geopolitical risks increase demand for gold
In addition to monetary policy, increased geopolitical risks are also increasing the attractiveness of gold, a traditional safe haven.
Risks included wars in Ukraine, the Middle East and the US presidential election in November, wrote Hansen of Saxo Bank.
The US presidential election is a cause for concern because both candidates “are willing to spend money they don’t have, thereby further increasing the US debt level,” Hansen added.
In China, too, consumers are turning to gold to preserve the value of their investments in the face of the economic downturn, the massive real estate crisis and the weak currency.
“Continued central bank demand in the face of geopolitical uncertainty and de-dollarization, and not least gold’s ability to provide a level of safety and stability that other assets may not be able to offer,” would lend support to the yellow metal, Hansen wrote.
