(Kitco News) – After years of trading in a range below $2,000 per ounce, gold has seen its best performance since 2019 as the yellow metal surged to a new all-time high near $2,450 in early May, and looks poised to continue its trek higher, according to one academic.
In a recent article written by Xu Le, a lecturer in the Department of Strategy and Policy at the National University of Singapore (NUS) Business School, Le laid out her reasoning for why gold prices are expected to rise in the latter half of 2024 and in 2025, pointing to increased demand from central banks in East and Central Asia, and a rise economic uncertainty.
“Many investors believe that gold, as a versatile precious metal, traditionally shows an inverse correlation with Federal rates,” she said. “Given its denomination in dollars, when interest rates climb and the U.S. dollar strengthens, gold prices generally decline. However, this relationship has appeared to be less predictable recently. Over the past few years, despite high Federal rates and a stable U.S. dollar, gold prices have not only held firm but have soared to new heights.”
Le said this shows that while the influence of the U.S. dollar on gold prices “is significant,” it’s only one of a number of factors that play crucial roles, including inflation, monetary policy, and supply and demand.
As global economic conditions grow more uncertain by the day, Le said gold has stepped “into the spotlight, offering investors a sanctuary to shield their wealth amid economic uncertainty and escalating inflationary pressures.”
“Gold serves as a hedge against inflation, and this is a key reason why investors turn to it in times of economic turbulence,” she said. “During times of escalating inflation, the general price level surges, diminishing the purchasing power of fiat currencies. At such times, gold steps into the spotlight, offering investors a sanctuary to shield their wealth amid economic uncertainty and escalating inflationary pressures. Gold is no doubt recognised as a safe-haven asset, especially during periods of turbulence.”
Citing the string of aggressive rate hikes implemented by the U.S. Federal Reserve starting in March 2022, Le said the move was intended to help mitigate inflation and bolster the U.S. dollar, which would typically “diminish the attractiveness of non-yielding assets like gold.”
“Indeed, gold prices experienced a dip to around US$1,664 per ounce in 2022,” she noted. “However, the story of gold’s resilience is also shaped by other dynamic factors, including a slowdown in interest rate hikes, global economic uncertainty, and geopolitical tensions. By the end of 2023, gold prices had rebounded significantly to US$2,078 per ounce. The average gold price for 2023 stood at US$1,940.54 per ounce, marking an 8% increase over 2022.”
For the Federal Reserve, things have not quite gone as planned in the intervening years as the central bank continues to struggle to achieve their 2% inflation target, leading to a delay in the expected rate cuts.
“Given this complex economic landscape and other uncertainties, the gold price is expected to maintain its stability in the near term,” Le said. “Looking ahead, the potential reduction in rates could see gold prices climbing once more. Investing in gold is a prudent strategy for those seeking to combat inflation and diversify their investment portfolio. With its nature as a safe haven, gold is expected to sustain its influence, pushing its price higher in the latter half of 2024 and in 2025.”
One of the most significant factors in shaping recent trends in gold prices is increased demand coming from central banks, “particularly in the emerging markets of East and Central Asia,” Le noted.
“According to a recent report from the World Gold Council, these regions have spearheaded net gold purchases in the first quarter,” she said. “This aligns with the 2023 Central Bank Gold Reserves Survey, which indicates a minor strategic shift towards greater allocations of gold in national reserves over the next five years.”
Le added that the trend of de-dollarization is starting to pick up steam, “with many countries actively diversifying their currency reserves by accumulating gold and alternative currencies.”
“A noteworthy example of central banks acquiring gold is China’s central bank, which has been continuing its gold purchasing, marking its 17th consecutive month of purchases in March,” she said. “China’s aggressive accumulation, which included an addition of 60,000 troy ounces in April, signals a robust demand from the official sector currently driving gold’s price surge.”
Since October 2022, gold’s share of China’s total reserves has climbed from 3.2% to 4.6%, Le noted, but said it still remains well below the gold reserves held by countries like the U.S., Germany, Italy, and France, “where gold has a much larger share at around more than 65% of their national reserves.”
Citing comments from Zhao Qingming, vice president of the China Foreign Exchange Investment Research Institute, Le said the ongoing expansion of gold reserves aligns with China’s long-term strategic interests and is “aimed at optimizing and diversifying the structure of reserve assets, enhancing overall reserve stability.”
She also noted that demand for gold jewelry in China increased by 10% in 2023, while investments in gold bars jumped 28%.
“The enthusiasm for gold extends not only to the officials-level in China but also to its retail market,” Le said. “China’s gold market represents approximately one-fifth of global sales.”
Another notable development highlighted by Le is the rise in demand from younger demographics, “who are increasingly turning to gold as an investment vehicle amid lacklustre performance in other domestic assets like real estate and stocks.”
“Overall, amid a landscape of growing geopolitical tensions and global uncertainties, such as upcoming general elections in the U.S. and other countries, the role of gold as a stable investment continues to be reinforced,” Le concluded. “Central Banks in markets such as China, India, and Turkey are proactively boosting their gold reserves. Therefore, these multifaceted dynamics are expected to continue bolstering gold prices in the foreseeable future.”
