Gold prices have been skyrocketing, continuously breaking records, driven mainly by geopolitical tensions, economic uncertainty, expectations of interest rate cuts, and strong demand from countries like China. These factors have to some extent fueled the rise in gold market prices.
In October 2024, gold prices hit a historic high of $2,790 per ounce. By December, prices fluctuated around $2,600 per ounce. On January 17, 2025, the price reached $2,718 per ounce. From a technical perspective, gold prices are currently above both short-term and long-term moving averages.
At the beginning of 2024, the price of the SPDR Gold Trust Fund was $189.32. As of January 17, 2025, it had risen by 32% to $249.40. This fund aims to track the price of one-tenth of an ounce of gold. If the stock price deviates from the market price of gold, the fund manager will exchange 100,000 shares of stock for 10,000 ounces of gold.
Several factors influence gold prices:
1. Supply and demand.
Basic economic principles dictate that supply and demand play a crucial role in gold prices. Increase in demand for gold, whether for jewelry, industrial use, or due to investors’ optimism, tends to drive prices up. In 2022, global gold supply saw a halt to its consecutive two-year decline. Countries like China and India have seen a continuous increase in gold demand due to cultural preferences. Central banks worldwide are also increasing their gold reserves. Limited mining output and finite gold reserves result in a relatively fixed supply of gold, enhancing its value as a store of wealth.
2. Market sentiment.
Gold is seen as a “safe haven” asset. During periods of economic uncertainty or geopolitical tensions, investors typically flock to gold, pushing up its price. Recently, the threat of increased tariffs by the U.S. has impacted gold prices. However, market sentiment towards gold has had a slightly bearish outlook, reflecting strong economic indicators and expectations regarding the Federal Reserve’s monetary policy decisions.
3. Inflation.
Traditionally, gold is viewed as a hedge against inflation. When inflation expectations rise, investors may purchase gold to protect their purchasing power, thereby driving up its price. During high inflation periods, like the 1970s, gold prices have soared significantly as people sought to safeguard their wealth. However, it is essential to note that gold’s performance as an inflation hedge is not always consistent. While it performs well during some high inflation periods, there are times when its performance lags behind other assets.
4. Interest rates.
Real interest rates (i.e., adjusted for inflation) impact gold prices. When rates are low, gold becomes more attractive as an investment compared to interest-bearing assets. Many economists believe that there is an inverse relationship between gold prices and interest rates, but this is not always the case. In reality, gold prices are driven not by nominal rates (rates unadjusted for inflation) but by real rates. For investors, what matters is the relationship between gold and real rates, not necessarily the federal funds rate or nominal interest rate yield.
5. Currency value.
Gold prices have an inverse relationship with the value of the U.S. dollar. When the dollar weakens, gold priced in dollars becomes cheaper for holders of other currencies, thus boosting gold prices. Although gold is no longer a primary form of currency in developed countries, it still holds significant sway over the value of these currencies. There is a strong correlation between gold value and the strength of currencies in the foreign exchange market.
6. Geopolitical events.
Political instability, wars, and other geopolitical events trigger market uncertainty, prompting investors to turn to gold as a relatively safe asset. Geopolitical events typically have a significant impact on gold prices, making it a preferred safe haven asset for investors during uncertain times. Historical data indicates a direct correlation between geopolitical events and gold prices, with gold prices often rising during conflicts and tense periods.
7. Central banks.
Central banks, as financial institutions responsible for overseeing and managing a country’s monetary system and financial stability, play a critical role in the economy and financial system of a nation. They hold vast amounts of gold, and their buying and selling activities have a certain influence on the market. For instance, if a central bank announces significant gold purchases, this announcement alone could push up gold prices. The motives behind central banks’ significant gold purchases generally include:
– Diversification of foreign exchange reserves.
– Gold is seen as a store of value that maintains its worth over centuries, immune to the effects of inflation or devaluation.
– In times of economic and geopolitical uncertainty, gold serves as a hedge asset against financial instability, trade disputes, and political conflicts.
– Gold can be utilized to achieve monetary policy goals, such as affecting the money supply, interest rates, and exchange rates.
– Trade surplus countries or economies focusing on exports purchase gold to manage international balance of payments. Gold can also be used to settle international trade imbalances and support domestic currencies.
These factors often interact in complex ways, resulting in dynamic changes in gold prices that can be challenging to predict. Given this backdrop and situation, we offer the following recommendations for individuals considering investing in gold:
– Define your financial goals, risk tolerance, and investment horizon when investing in gold. Clarify whether you aim to hedge against inflation risks, achieve asset diversification, or seek refuge in times of economic uncertainty.
– There are various investment options in gold, including physical gold (such as bars, coins, and jewelry) that require storage and entail security risks, gold exchange-traded funds (ETFs), and mutual funds that provide a convenient way to invest in gold without physical storage, and gold mining stocks that offer leveraged price exposure but come with specific company risks.
– Stay informed about the latest information. Monitor current market trends and economic indicators influencing gold prices, such as inflation rates, interest rates, and geopolitical events.
– Investment horizon. Gold exhibits significant price volatility in the short term, but historically it has been a store of value in the long term. Ensure that your investment horizon (e.g., long-term) aligns with the nature of gold investments and conduct periodic reviews.
– Costs and fees. Understand the costs associated with buying, selling, and storing gold, as well as the management fees of gold ETFs and mutual funds.
– Portfolio allocation. Financial advisors suggest allocating 5% to 15% of your portfolio to gold and other precious metals. The specific proportion depends on your individual financial goals, risk tolerance, and investment time frame. If you are a risk-averse individual concerned about economic uncertainty, geopolitical tensions, and the threat of war, you may opt for a proportion close to the upper limit of this range.
The following quotes underscore gold’s enduring properties as an asset that can act both as a hedge against economic uncertainty and provide protection during sustained market volatility:
“An investment principle is buy low, sell high, and that’s exactly what gold represents.” – Harry Browne, author and investment advisor.
“Gold has always been a reliable store of value.” – Mark Nestmann, Founder and President of The Nestmann Group.
However, as with all investments, thorough research is essential before investing.