Why Did Gold Prices Hit All-Time Highs?

In recent weeks Gold prices have reached new all time highs. Understanding why prices have reached these levels are as simple as looking at the old-fashioned monetary policy set by the Feds. 

Last Tueaday (March 5th, 2024) spot Gold prices soared up to $2,141 (USD/Oz), which marked a 5.6% increase in prices in a single month and a 16% increase in the past year. Then later as the week progressed, Gold prices closed at $2182 (USD/Oz). With the increased prices, we have seen the demand for the precious metal stay strong and consistent, especially with central banks continuing the purchase Gold as a hedge against inflation. 

Additionally, many investors are optimistic that central banks around the world will collectively reduce interest rates later this year. Which as a result could further increase Gold prices. This is fueled by a multitude of economic indicators.

The Relationship Between the Federal Reserve and Gold Prices

During times of economic crisis, Gold is often seen as a safe haven asset. Since Gold doesn’t offer some sort of investment yield, when interest rates are up and other investments offer a yield there is less demand. Now since, there is speculation of interest rates coming down, bonds and other investments become less appealing and there is more demand driven towards Gold. Regardless, over the past year, investors have increasingly raised their expectations for central banks to lower interest rates as growth in the economy has slowed. 

The expectation for interests to come down, is grown even heavier these past few weeks with roughly 70% of U.S investors predicting that come June, interest rates will come down. This number is up from the 58% which was at the end of February. Moreover, with inflation starting to ease, investors are eagerly hoping to see rate cuts despite the uncertainty with the upcoming elections. 

Citi Bank’s research note suggests that this uncertainty might continue to support gold prices. Berenberg analysts believe that a potential win by Donald Trump in the U.S. presidential election could further boost gold’s appeal.

However, ING analysts emphasize that the Federal Reserve’s policy will remain a crucial factor for gold prices in the upcoming months, indicating that prices may continue to be influenced by short-term expectations of rate cuts.