International gold prices reached a continuous peak, increasing by 350 USD in just two months, due to political fluctuations, purchasing power of central banks and expectations of the US reducing interest rates.
On April 9, world gold prices peaked for the 7th consecutive session, touching 2,365 USD an ounce. Since the beginning of the year, this precious metal has increased by 16.5%.
Prices have increased sharply since mid-February and in two months each ounce has become more expensive by 350 USD. Analysts believe that this increase has many reasons. These are geopolitical instability, purchasing power of central banks and expectations that the US Federal Reserve (Fed) will reduce interest rates this year.
Expectations that the Fed will lower interest rates are still the main driving force for gold, according to UBS Bank (Switzerland). Gold prices often move inversely with interest rates, because precious metals do not pay fixed interest. Therefore, when interest rates increase, investors will be attracted to investment channels with higher returns, such as bonds. On the contrary, in a low interest rate environment, gold is more attractive. In addition, the Fed’s lowering of interest rates also pulls down USD prices, making precious metals less expensive for buyers outside the US.
CME FedWatch interest rate tracker shows that the market currently forecasts a 51% chance of the Fed cutting interest rates by 25 basis points (0.25%) in June. In fact, this expectation has supported gold prices since the end of last year, when inflation in the US cooled significantly and the Fed kept interest rates unchanged for more than half a year.
World gold prices have increased rapidly in the past 2 months. Graph: Goldprice
In a speech on April 3, Fed Chairman Jerome Powell said the fight against inflation is still a “rough road”. However, this agency believes that interest rate reduction to rebalance the economy will still take place this year. Last month, the Fed forecast that interest rates would be lowered three times this year.
The Personal Expenditures Index (PCE) – the Fed’s preferred measure of inflation – increased 2.5% in February compared to the same month last year. This pace is higher than January. However, core PCE (excluding energy and food prices) is lower. Slowing inflation will increase the likelihood of the Fed cutting interest rates.
The purchasing power of central banks also supports gold prices to go up. The World Gold Council (WGC) report also shows that in the first two months of the year, global central banks continued to buy gold. China has the world’s largest net purchase, with about 22 tons. Followed by Türkiye and India. The Russian Central Bank has also accelerated gold accumulation since the war in Ukraine.
Official data released on April 7 showed that the China Central Bank (PBOC) increased gold reserves for the 17th consecutive month. PBOC gold holdings increased 0.2% in March, to 2,273 tons – the highest since November 2015.
WGC identifies gold as an important component in the reserves of central banks globally, thanks to its safety, high liquidity and profitability. These agencies are also the world’s largest gold holding group, accounting for 20% of the amount mined globally to date.
Central banks have increased gold purchases from 2022. In its 2023 Gold Demand Trends report, WGC said purchases from banks exceeded 1,000 tons in 2022-2023. This is the second consecutive year this group bought over 1,000 tons of gold.
Employees stamp gold bars at the factory in Kasimov (Russia). Image: Reuters
Meanwhile, according to UBS, central banks may want to reduce their dependence on the US dollar and take refuge in times of political turmoil. JP Morgan’s report in March also agreed with this view. They said that countries that are not US allies appear to be hoarding gold to diversify their assets, reduce the USD and hurt from international sanctions.
According to many analysts, the demand of central banks is the main factor helping precious metals maintain the support threshold of $2,000 over the past few months. “I think central banks will continue to increase gold purchases. The currency reserves of other countries are increasingly less meaningful, in the context of a polarized and unstable world,” Ryan McIntyre – Director of the company Sprott Asset Management, said in a recent interview with Kitco News.
PBOC’s increase in reserve purchases also increases the demand of individual investors in this country. They consider gold as an alternative asset in the context of real estate and stock markets going down over the past few years, Capital Economics explains.
Another factor causing gold to escalate is geopolitical fluctuations. Earlier this month, the Syrian Ministry of Defense said that Israeli military aircraft on the evening of April 1 attacked the Iranian embassy area here, killing a general. Iran later announced it would retaliate against Israel. This development pulled the gold price closer to 2,290 USD per ounce in the April 2 session.
In fact, gold prices increased sharply in the last two months of last year, due to tensions in the Middle East breaking out. With recent developments, this conflict is at risk of spreading in the region.
This year, voters in more than 60 countries around the world will participate in elections, including the United States. Experts believe that these economic and political fluctuations will continue to help the gold market peak.
At the end of February, analysts at Citi Bank said that gold could reach $3,000 an ounce in the next 1-1.5 years. But with recent developments, experts believe that precious metals may reach this milestone sooner than forecast.