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  • Writer's pictureJade Rossback

Why Gold is Surging to New Highs

Gold Bars

Gold prices have recently surged to new highs, driven largely by record purchases by central banks as well as by consumers in India and China. The precious metal also benefitted from its safe haven status amid rising geopolitical risks and as a hedge against persistent inflation.

Hopes that the Federal Reserve will start cutting interest rates later this year also boosted gold. Gold is now up about 30% since October last year.

Central Bank Purchases

Gold purchases by central banks have soared in recent years, particularly following Russia's invasion of Ukraine. Central banks made net purchases of 1,037 tons last year, according to the World Gold Council, and continue to accumulate gold this year.

Rapidly rising debt and fiscal deterioration in the US are among the reasons why central banks are diversifying away from the US dollar.

China’s Gold Demand is Surging

China is currently the world’s biggest producer and consumer of gold. Historically, China and India were in a close race for the world's biggest buyer of gold. However, that changed last year according to Bloomberg as Chinese consumption of jewelry, bars, and coins surged to record levels.

Chinese consumers have been buying more gold as they look for alternative investment options amid weak stock market returns and a prolonged real estate crisis. Unrelenting Chinese demand is likely to support gold in the coming months.

The People’s Bank of China added a net 225 metric tons to its reserves last year, more than any other central bank, according to the World Gold Council. This was the biggest addition since 1977.

Safe Haven & Inflation Hedge

Geopolitical tensions have been rising in the wake of the Russia-Ukraine war, the Israel-Hamas conflict, and the increasing risks of China's invasion of Taiwan. Gold is seen as a safe haven in times of volatility and geopolitical stress.

While inflation has come down significantly from its multi-decade high levels, it is expected to remain persistent for the coming months as recent data has suggested.

Monetary Policy Shift

In general, gold has performed better historically during periods of monetary easing. Lower interest rates reduce the opportunity cost of owning gold, thereby boosting its appeal, as the precious metal does not yield any income.

As the Federal Reserve began its aggressive tightening campaign in March 2022, raising interest rates 11 times, real interest rates rose sharply. Consequently, gold prices could have been predicted to fall much further during this period.

However, gold prices held steady despite rising rates and a strengthening US dollar, thanks to several factors, including record central bank buying and geopolitical tensions around the world.

As the US economy and labor market continue to be incredibly robust, interest rate cuts may start only later this year. The anticipated monetary policy shift by the Fed and other major central banks could strengthen gold in the coming months.

Growing Indian Economy May Boost Demand

India, the second-largest consumer of the metal, is also expected to see an increase in demand with rising consumer incomes as the economy continues to grow.

India's gold demand has been range-bound between 700 and 800 metric tons in the past five years, but the World Gold Council projects it to rise to between 800 and 900 tons this year.

Should You Buy Gold Now?

Despite jumping to new all-time highs, gold is still some way off its inflation-adjusted all-time high of $3,355 per ounce reached in 1980, according to the Financial Times, when it enjoyed a nine-year bull run driven mainly by turmoil in the Middle East.

In my view, gold deserves a small place in the portfolio mainly due to its portfolio diversification benefits.

Neena Mishra, CFA, FRM, manages the ETF Investor portfolio at Zacks Investment Research

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