The gold price is trading above $2,400 and has surged significantly since the beginning of the year. What factors support further gains in the “crisis currency” and what may hinder it – along with expert forecasts.
Gold is highly favored by savers and central banks.
The gold price continues to break records. The price of an ounce of the precious metal reached $2,411 on Friday, nearly 17% higher than at the beginning of the year. The lower-than-expected inflation in the US is seen as the trigger for the recent price increase. Investors are now hoping for imminent interest rate cuts by the US Federal Reserve – and lower interest rates reduce the opportunity costs of holding gold, which does not yield interest or dividends.
The strong increase this year caught many observers off guard. Historically, the gold price mainly reacts to lower real interest rates or a weak dollar – neither of which was the case recently. Moreover, demand from investors for Exchange-Traded Funds (ETFs) in gold has also been limited. These are investment products that allow investors to indirectly invest in the precious metal.
Reasons for the Soaring Gold Price
Behind the rapid increase in the gold price are some powerful drivers. The main reasons for the recent surge in the precious metal are as follows:
- Central bank purchases from emerging markets: According to Claudio Wewel, currency strategist at Bank J. Safra Sarasin, the Turkish central bank purchased a significant amount of gold in the first quarter of this year, followed by the Chinese central bank. The latter has reported gold purchases for 18 consecutive months to its gold reserves, as stated in the annual gold report published by asset manager Incrementum on Friday. “This is a structural movement that has been increasingly observed since the outbreak of the Ukraine war,” says Wewel. Often, these are regimes seeking to hedge against future US sanctions.
- Purchases by Chinese retail investors: The real estate crisis in China and the poor performance of the Chinese stock market are also likely to play a significant role in the rise of the gold price. Additionally, the Chinese government is increasingly monitoring citizens’ foreign investments. “This has made gold one of the last remaining options for Chinese savers to invest their money,” says Wewel.
- Difficult geopolitical situation: The traditional role of gold as a “crisis currency” is becoming increasingly prominent. Following the war in Ukraine, the Gaza conflict after the Hamas terrorist attack on Israel on October 7 last year has created significant geopolitical tensions.
A new paradigm? Ronald-Peter Stöferle and Mark Valek of Incrementum even observe a revaluation of gold within the spectrum of investment instruments. After all, the price of the precious metal has risen in an environment where, based on past experience, it should have fallen, they share. “In the old paradigm, it was unthinkable for the gold price to trend higher during a period of sharply rising real interest rates.” One factor is the years of zero and negative interest rate policies by central banks, which have “atomized” all risk premiums.
Different Forecasts
After the rapid increase, the opinions of financial market participants on the further development of the gold price are now divided.
“A jump from $2,000 to $2,400 within such a short time cannot be fundamentally explained,” says Thomas Stucki, Chief Investment Officer of St. Gallen Cantonal Bank (SGKB). “There is a lot of speculation involved.” Consequently, the gold price could also correct rapidly by $200 to $300, as rapid increases always entail potential setbacks. While central bank purchases are an important factor for the increase, this is not a new development, says Stucki. “At the current price level, investors can also take profits in gold.”
“At some point, there will be a time for a breather, a consolidation in the gold price,” Stöferle also said on Friday during the report presentation. However, Incrementum expects the price to rise to $4,800 per ounce by the end of 2030. This would mean an average annual increase of 12% by the end of this decade.
Safra Sarasin currency strategist Wewel also sees no risk of a significant setback in the gold price. Especially central bank purchases ensure that the price of the precious metal has a certain floor. “For the gold price to fall below $2,200 again, a very specific scenario would have to occur,” he says. Such a scenario could be a significant rapprochement between China and the US or a substantial reduction in geopolitical tensions. However, both are currently unlikely, says Wewel.
Potential for Further Silver Price Increase?
In the wake of gold, the price of silver has also risen significantly. An ounce of the precious metal, also known as the “little brother” of gold, cost $30.70 on Friday, about 29% higher than at the beginning of the year.
Wewel is also optimistic about the development of the silver price. Silver has been somewhat overshadowed by gold in recent years, but now the price could catch up more strongly, according to the currency strategist. Unlike gold, silver is also used more as an industrial metal, as it is needed in electronic applications, for example. The silver price could benefit from the boom in artificial intelligence. However, investors should note that the silver price fluctuates significantly – even more so than the gold price.