Why gold prices are going up? And why they are not going to come down anytime soon

Rally in Gold Prices: “Well, I pay attention to the price of gold, but I think it reflects a lot of things. It reflects global uncertainties,” Ben Bernanke, Chairman of Federal Reserves said in 2011.  According to Bernanke, gold prices can act as an indicator of the health of the economy. A rise in the price of gold may be a signal that the economy is struggling. As a result, in times of either crisis or inflation, many investors turn to gold to protect their principal. And the current rally in gold prices is also attributed to geopolitical tensions between Iran and Israel. And as history is replete with evidence, whenever the global economy has been under pressure due to one reason or the other, safe asset prices have always jumped manifold. 

Israel’s Iron Dome air defense system launches to intercept missiles fired from Iran, in central Israel | Image credit: AP

Take the current example, Gold prices have rallied like never before, as much as they have rallied in the last three months, the yellow metal prices have shot up by over 15 per cent. The geopolitical implications arising in the Middle East, escalated by Iran’s recent attack on Israel, are pushing investors to rush towards safe-haven assets including Gold. 

Gold prices in last 3 days | Image credit: GoldPrice.org 

Gold is considered a safe asset during geopolitical uncertainty due to its intrinsic value, scarcity, and historical role as a store of wealth. Investors view gold as a hedge against inflation, currency devaluation, and political instability, seeking its stability and preservation of value in times of crisis.

Air traffic over Iran and neighbouring West Asian states | Image credit: Reuters 

But it is not only gold which is going up, but silver too has gone up significantly by 13 per cent ever since the start of 2024. In recent times, the price rally showed that gold has emerged as the best-performing asset class since the start of this year.  

Apart from the geopolitical tensions, the central bank’s aggressive gold buying to get rid of the dollar is pushing the yellow metal towards new price peaks. 

What is behind the gold rush?

Vipul Shah, Chairman of Gems and Jewellery Export Promotion Council in an exclusive conversation with Republic Business said, “The current surge in gold prices is fuelled by geopolitical tensions, and the rebalancing of asset class done by all central banks across the world.”

“As far as prices are concerned, if these geopolitical tensions cool down going forward I see gold prices hovering between $2,050 to $2,100 per ounce and if the geopolitical tension escalates the prices can go to $3,000 per ounce,” Shah said.  

Brent Oil Futures - Jun 24 | Image credit: Investing.com

Any disruptions in Iran, the third-largest producer of oil in OPEC, would affect global oil markets and potentially take the price of Brent crude oil to $100. Apart from that, a threat to the closure of the Strait of Hormuz can further escalate the crude oil prices to the $120 to $130 range, according to media reports. 

Rebalancing of Asset

According to experts, investors who think the Federal Reserve will lower interest rates are pushing prices up, but there are other reasons too. Central banks, led by China, are buying more gold to rely less on the US dollar. Gold is the most stable asset during the tough times and is also the hedge against inflation. Also, when interest rates decline gold prices tend to move up as people prefer gold over other asset classes such as bonds etc. 

“There are many central banks who are getting rid of dollars and buying gold in huge quantities in their forex kitty and that is what is driving the prices up. It's not like there is no underlying demand but demand is not such that prices can go up to this level,” Shah told Republic Business. 

The People's Bank of China has been steadily buying gold for 17 months in a row, adding 160,000 ounces in March alone. This brings their total gold reserves to 72.74 million troy ounces, according to Reuters. Central banks, including China's, are diversifying their reserves away from US dollars by purchasing gold, particularly in times of geopolitical uncertainty, as suggested by a recent UBS research note. This growing demand from central banks is contributing to the upward trend in gold prices, already buoyed by traditional investors.

Chinese investors are also turning to gold as an alternative asset, especially amid declines in property and stock markets in recent years, according to a Capital Economics report.

“I don’t think prices are going to come down, even if there will be a slight correction the gold will find support from demand and the prices will shoot up again,” Shah opined. He added further earlier people and banks used to buy dollars, Yen, and Euro, but considering the volatility in economic conditions, people are not buying currencies and are preferring gold over these currencies. 

Why Central Banks are buying Gold?

The central banks buying gold means that they want to reduce their reliance on the US dollar. In addition, this also suggests that the dollar is emerging as a less attractive asset class for the central banks as they are trying to reduce their dependence on the US. 

According to a note by JP Morgan, countries that are not on good terms with the US might be getting more gold to use fewer dollars and avoid getting hurt by sanctions. JP Morgan also says that central banks buying gold a lot since 2022 have made gold prices go up.

Are high gold prices impacting the market?

According to Vipul Shah, higher gold prices are not a good thing for gems and jewellery businesses as high prices are slowing the demand. “We do export around 18-20 per cent of our exports to Middle Eastern markets and this could impact our business by 30-35 per cent.”