Gold | Will the increase continue? These are the forecasts

The price of gold is going from record to record. The price for an ounce of the precious metal was $2,411 on Friday, almost 17 percent higher than at the beginning of the year. The trigger for the recent price increase is lower than expected inflation in the USA. Investors are now increasingly hoping that the US Federal Reserve will soon cut interest rates – and lower interest rates reduce the opportunity cost of holding gold, which pays neither interest nor dividends.

The sharp increase this year came as a surprise to many observers. Historically, the price of gold responds primarily to lower real interest rates or a weak dollar – but neither was the case recently. In addition, investor demand for gold exchange-traded funds (ETFs) has recently been limited. These are investment products that allow investors to indirectly invest funds in the precious metal.

Reasons for the soaring

But there are some powerful drivers behind the rapid rise in the price of gold. The main reasons for the recent rise 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 bought particularly heavily in gold in the first quarter of this year, followed by the Chinese central bank. The latter has reported purchases to its gold reserves for 18 months in a row, according to 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 war in Ukraine,” says Wewel. These are often regimes that want to protect themselves against US sanctions in the future.

The freezing of Russia’s foreign reserves showed the local governments that debt-based foreign reserves ultimately “represent just a promise” and can be converted into worthless database entries in the event of a conflict, according to the report, which is widely followed in the industry.

Purchases by Chinese retail investors: In addition, the real estate crisis in China and the weak performance of the Chinese stock market are likely to play an important role in the rise in the price of gold. In addition, the Chinese government is increasingly monitoring citizens’ foreign investments. “This has resulted in gold becoming one of the last remaining options for Chinese savers to invest money,” says Wewel.

Difficult geopolitical situation: The traditional role of gold as a “crisis currency” is also becoming increasingly apparent. After the war in Ukraine, the Gaza war following Hamas’ terrorist attack on Israel on October 7th last year is also causing major geopolitical tensions.

A new paradigm? Ronald-Peter Stöferle and Mark Valek from Incrementum are even observing an appreciation of gold in the spectrum of investment instruments. After all, the price of the precious metal rose in an environment in which, according to experience, it should have fallen, they say. “In the old paradigm, it was unthinkable that the price of gold would trend higher during a phase of sharply rising real interest rates.” One factor in this is the central banks’ long-standing zero and negative interest rate policy, which has “atomized” any risk premiums.

High national debt: The low interest rates have also provided countries with incentives to take on a lot of debt. According to Incrementum, the US debt level has increased by $11 trillion or around a third since the fourth quarter of 2019 – i.e. before the outbreak of the Corona crisis. Historically, over-indebtedness has usually led to government financing by central banks, increased financial repression and inflation, the report says. This also speaks in favor of investing in gold.

Different forecasts

After the rapid increase, the opinions of financial market participants are now divided about the further development of the gold price.

“A jump from $2,000 to $2,400 within such a short period of time cannot be explained fundamentally,” says Thomas Stucki, head of investment at St. Galler Kantonalbank (SGKB). “There’s a lot of speculation involved.” The gold price could therefore quickly correct by 200 to 300 dollars, because with rapid increases there is always the potential for a setback. Of course, central bank purchases are an important factor in the increase, but this is not a new development, says Stucki. “At the current price level, investors can also take profits on gold.”

“At some point the time will come for a breather, a consolidation in the gold price,” said Stöferle on Friday when presenting the report. By the end of 2030, Incrementum expects the price to rise to $4,800 per ounce. This would mean an average increase of 12 percent per year by the end of this decade.

Safra-Sarasin currency strategist Wewel also sees no danger of a significant setback in the price of gold. Central bank purchases in particular ensured that the price of the precious metal reached a certain level. “For the gold price to fall below $2,200 again, a very special scenario would have to occur,” he says. This could, for example, be a significant rapprochement between China and the USA or a significant decrease in geopolitical tensions. Unfortunately, both are currently unlikely, says Wewel.

Rather, he also sees potential for a further increase in the price of gold. In his view, the classic factors for gold bull markets should provide additional upside potential. When interest rates fall, the opportunity cost of holding gold decreases – making it more attractive to invest in the precious metal.

In addition, under normal circumstances, a strong dollar usually depresses the price of gold. If the currently strong dollar weakens, this could further support the gold price. As a result, Bank J. Safra Sarasin recently increased its price targets for gold. She expects a gold price of $2,500 for the fourth quarter of this year and $2,600 for the fourth quarter of 2026.

Although the price of gold has recently risen in step with the stock market, Wewel does not believe that the precious metal has lost its diversifying properties in a portfolio. Even if the economic cycle weakens, the structural drivers of the gold price, such as central bank demand, are likely to remain intact. So even if there is a setback in the stock market, that doesn’t mean that the price of gold will also fall.

Chances for silver to rise further?

In the slipstream of gold, the price of silver has also risen significantly. An ounce of the precious metal, which is also known as gold’s “little brother,” cost $30.70 on Friday, around 29 percent more than at the beginning of the year.

Wewel is also positive about the development of the silver price. Silver has been somewhat overshadowed by gold in recent years, but the price could now follow suit, the currency strategist expects. In contrast to gold, silver is also used more as an industrial metal, for example in electronic applications. The price of silver could therefore benefit from the boom in artificial intelligence. Investors should note, however, that the price of silver fluctuates greatly – significantly more than the price of gold.