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 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 health of economy. A rise in price of gold may be a signal that economy is struggling. As a result, in times of eir crisis or inflation, many investors turn to gold to protect ir principal. And current rally in gold prices is also attributed to geopolitical tensions between Iran and Israel. And as history is replete with evidence, whenever global economy has been under pressure due to one reason or or, 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 current example, Gold prices have rallied like never before, as much as y have rallied in last three months, yellow metal prices have shot up by over 15 per cent. geopolitical implications arising in 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 start of 2024. In recent times, price rally showed that gold has emerged as best-performing asset class since start of this year.  

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

What is behind gold rush?

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

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

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

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

Rebalancing of Asset

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

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

People's Bank of China has been steily buying gold for 17 months in a row, ding 160,000 ounces in March alone. This brings ir total gold reserves to 72.74 million troy ounces, according to Reuters. Central banks, including China's, are diversifying ir 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 upward trend in gold prices, alrey buoyed by tritional 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 re will be a slight correction gold will find support from demand and prices will shoot up again,” Shah opined. He ded furr earlier people and banks used to buy dollars, Yen, and Euro, but considering volatility in economic conditions, people are not buying currencies and are preferring gold over se currencies. 

Why Central Banks are buying Gold?

central banks buying gold means that y want to reduce ir reliance on US dollar. In dition, this also suggests that dollar is emerging as a less attractive asset class for central banks as y are trying to reduce ir dependence on US. 

According to a note by JP Morgan, countries that are not on good terms with 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 me gold prices go up.

Are high gold prices impacting market?

According to Vipul Shah, higher gold prices are not a good thing for gems and jewellery businesses as high prices are slowing 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.”