Surge or Safe Haven: Why Are Gold Prices Rising to New Record High?

Gold futures prices closed trading on Friday, April 19, at a significant rise, supported by demand for safe haven assets in light of the escalation of geopolitical tensions in the Middle East, with the most active contracts for the golden metal achieving gains for the fourth week in a row.

Spot gold was up by 0.7% at $2,395.15 per ounce after rising as high as $2,417.59 earlier in the session. Prices were up 2.2% this week. U.S. gold futures settled 0.7% higher at $2,413.8.

The increasing geopolitical tensions in the Middle East and Ukraine, expectations of a reduction in U.S. interest rates, and China's accumulation of the precious metal in light of the ongoing problems in its economy enhance the attractiveness of gold bullion as a safe haven.

"In addition to monetary policy, geopolitical uncertainty is often a key driver of gold demand, and in 2024, we expect this to have a pronounced impact on the market," the World Gold Council report said.

So far, the precious golden metal's gains since the beginning of this year have reached about 15%, exceeding the 13% advance recorded throughout last year.

Safe Haven

The current unprecedented rise in gold prices is due to a number of factors, the most important of which is the ongoing inflation issue.

The latest CPI data showed that inflation rose from 3.2% in February to 3.5% in March, a worrying trend that continues to erode consumers' purchasing power.

With the threat of persistent high inflation looming, investors have increasingly turned to gold as a safe haven, sending demand and prices higher.

But during this period, geopolitical tensions are considered the primary control over the rise in gold prices, which was revealed recently after the sudden rise in gold with "Israel" launching an attack with drones on Iranian targets in response to the Iranian attacks on "Israel" last week, bringing gold prices to the highest level at $2,417 per ounce.

But gold prices declined quickly after the news showed that the Israeli attack was limited and did not lead to losses on the Iranian side, which appeared through its statements after the attack that it had no intention of responding.

After that, gold prices returned to the trading areas that dominated gold movements since the beginning of last week, at $2,394 per ounce.

Separately, data released in the United States on April 19 sparked fears that the U.S. Federal Reserve will take some time before cutting rates, a view held by a number of monetary policymakers.

Raising interest rates usually has a negative impact on the prices of the precious golden metal, which does not generate interest on investment.

As a result, gold prices recorded a new record high for the fourth week in a row, despite the volatility that has dominated gold movements since the beginning of last week.

The precious golden metal had risen by 6.7% since the beginning of April, following another rise it had achieved during the month of March by 9.2%.

On April 13, Goldman Sachs said that the precious metal is characterized by an unwavering bull market, and raised its forecast for the end of the year to $2,700, after it had previously expected it to reach $2,300 per ounce.

Goldman Sachs research predicts that prices may rise further, driven in part by expectations of interest rate cuts by the Federal Reserve.

Union Bank of Switzerland (UBS) also expected the price of gold to reach $2,500 by the end of the year.

Meanwhile, Citigroup analysts expected that gold prices may reach $3,000 per ounce during the next few months, noting that the demand for gold had increased in the period after the Corona pandemic.

Standard Height

It is noteworthy that the end of geopolitical tensions may push markets to focus on U.S. monetary policy expectations, which may push gold to decline due to expectations that interest rates will remain high for a longer period of time.

But at the same time, gold finds support from the purchases of gold by central banks, led by the People's Bank of China (PBC), to increase their reserves of the precious metal.

Last March, the PBC announced the continuation of buying gold for the seventeenth month in a row, continuing the long buying spree that helped raise the price of gold to a record level.

The PBC now holds about 2,257 tons of gold in its vaults, as per estimates.

In 2023, the PBC bought more gold than all other central banks.

In addition to the PBC, Chinese consumers are buying gold coins, bullion, and jewelry after the value of their real estate investments, the yuan currency, and the country's stock market declined due to recent economic problems in the world's second-largest economy.

Macroeconomist Koen De Leus and market strategist Philippe Gijsels, authors of the book "The New World Economy in Five Trends," predict that gold will rise to reach $4,000 in the not-too-distant future.

"It's not about interest rates. People are hedging against a new world," Gijsels says.

As a recent report by Currency Research Associates noted, "China buying gold and selling Treasuries mirrors how Europe's central banks began to redeem dollars for gold in the late 1960s as the Bretton Woods System began to break apart."

China relies heavily on the U.S. dollar in its trade with the rest of the world and as the world's reserve currency, as most goods are priced in dollars, and more than half of global trade is conducted using the dollar.

As China has grown to challenge U.S. economic dominance over the past 30 years, it has built up huge foreign exchange reserves, mostly in dollars, but Beijing fears becoming overly dependent on the U.S. currency, and is keen to diversify the reserves of the People's Bank of China.

Since 2011, China has begun to gradually reduce its holdings, which gradually decreased by a third to about $800 billion, according to U.S. data.

This decline has accelerated since the COVID-19 pandemic, which subsequently coincided with the goals of the other countries in the BRICS group (Brazil, Russia, India, China, and South Africa), whose economies are scheduled to              the global economy by 2050.

In turn, economic analyst Mustafa Shaheen explained in a statement to Al-Estiklal that "gold's gains are not consistent with the traditional view that has prevailed for decades regarding the inverse relationship between the dollar and gold, but the numbers show that the U.S. dollar index is already up 5% in 2024.

"Gold remains a good investment vehicle with low interest rates, a cover for stubborn inflation and a safe haven," he said.

Mr. Shaheen pointed out that "China's strategic accumulation of gold not only reflects efforts to protect its economy, but also reflects a challenge to the current global financial system dominated by the U.S. dollar."