The price of gold is gaining momentum again. The price of the precious yellow metal is sitting just under the mark where recovery in each of the last three years failed. Is history repeating itself?
Since early October, the price of gold has been going in just one direction: upward. Initially driven by the geopolitical tensions in the Middle East and then by the sharp decline in US bond yields and the US dollar, the yellow precious metal has really started to gain momentum.
Just under an all-time high
The price of gold had been lower since May. According to the most recent price rallies, gold, quoted in US dollars, is now listed as roughly 12 percent higher than at the start of the year.
Sitting at roughly $2,045, the price for the precious metal is now just under the 52-week high posted in May and the all-time high posted in August 2020. Word on the market is that gold could soon reach new record highs. Traditionally, the price of gold increases in December and posts more gains around Christmas time.
New highs in sight
A glance at next year increases expectations. Market investors and analysts are anticipating that in 2024, the US Federal Reserve will considerably cut interest rates in a multi-step process. Lower interest rates benefit gold as a non-interest-bearing asset because they force more liquidity from bonds to other investment areas.
If uncertainty persists due to geopolitical tensions, investors will continue to appreciate the world’s oldest store of value. An ongoing weak dollar would also peg the market.
Central banks are in the mood to buy
The demand for gold has come primarily from the central banks, who also back its price. This year, monetary authorities have again acquired an above-average amount of gold. Their net purchases were 337 tons in the third quarter. According to data from the World Gold Council (WGC), this is the third-strongest quarter on record.
Even though the record from the third quarter of last year was not broken, the central banks are continuing to purchase gold at a historic pace. In the first three quarters, they increased their gold reserves by a record-breaking 800 tons. The central banks’ demand for gold indicates that the 2022 annual record will be surpassed this year.
What are investors going to do?
Although signs of a further increase in the price of gold are promising, the upward potential seems to be limited at least over the short term. The price of gold is listed just under the mark where recovery in each of the last three years failed. Since the all-time high in 2020, these marks have repeatedly proven to be tough obstacles. Even technical indicators, such as the RSI, suggest that gold is currently in the overbought area.
For more upswing, investor demand would have to finally get rolling again. But the demand for exchange-traded index funds (ETFs) was disappointing in 2023. The outflow lasted over the whole year. According to information from the German trading and investment company, Heraeus Precious Metals, ETFs have dropped by 6.5 million ounces since early January.
The next price cap?
Combined with the fact that the Fed has not yet started reducing interest rates, this ought to put a damper on the further development of the gold price.
The market has largely already factored in the potential reduction in interest rates for the coming year. And fears of a recession have recently subsided again. If the dollar were also to trend stronger again, this would be another price cap.
