Gold prices (XAU/USD) has reached a record high near $2,441, driven by renewed hopes for interest rate cuts from the US Federal Reserve (Fed). Traders are anticipating almost two quarter-point cuts from the Fed this year, with November being the most likely starting point. Additionally, the People’s Bank of China (PBoC) purchased gold for the 18th consecutive month in April, adding 60,000 troy ounces of gold to its stash. Chinese investors are turning to gold as a safe-haven asset to hedge against economic uncertainties, contributing to the surge in gold prices. Recent data also shows that Turkey and many Middle Eastern countries are buying bullion, further boosting the price of the precious metal.
Gold has historically played a significant role in human history, serving as a store of value and medium of exchange. In addition to its ornamental use in jewelry, gold is now widely viewed as a safe-haven asset, making it a popular investment during turbulent times. It is also considered a hedge against inflation and depreciating currencies since it does not rely on any specific issuer or government. Central banks are the largest holders of gold, often diversifying their reserves to support their currencies in times of economic instability. Moreover, high gold reserves can enhance a country’s solvency and can be viewed as a source of trust in the economy.
Central banks have been increasing their gold reserves, with 1,136 tonnes of gold worth around $70 billion added to reserves in 2022, representing the highest yearly purchase since records began. Emerging economies such as China, India, and Turkey are rapidly boosting their gold reserves to strengthen their economies and currencies. Gold has an inverse correlation with the US Dollar and US Treasuries, both major reserve and safe-haven assets. A depreciation in the dollar tends to drive up gold prices, allowing investors and central banks to diversify their assets during uncertain times. Gold also moves inversely to risk assets, with a rally in the stock market typically weakening gold prices, while sell-offs in riskier markets favoring the precious metal.
The price of gold can be influenced by a variety of factors, including geopolitical instability and fears of a recession, which can quickly cause gold prices to soar due to its safe-haven status. As a yield-less asset, gold tends to rise when interest rates are low, while higher interest rates usually suppress the price of the metal. However, the price of gold is largely dependent on the behavior of the US Dollar, as gold is priced in dollars (XAU/USD). A strong dollar generally keeps gold prices in check, while a weaker dollar is likely to push gold prices higher. Overall, gold continues to be a valuable asset for investors seeking stability and diversification in their portfolios, particularly during times of economic uncertainty and market turbulence.
