Gold is often seen as a hedge against inflation, but in 2022, despite favorable conditions, the precious metal performed poorly, to say the least.
Although the situation improved somewhat in 2023, it still fell short of the S&P 500 index. As the U.S. moves closer to controlling rising prices, gold is breaking records.
So why this seemingly strange and counterintuitive market movement?
There simply wasn't enough investor demand. This lack of interest was probably due to the hope that inflation would slow down quickly and the economy would not suffer.
Geopolitical tensions gave gold prices wings, but when they eased, so did the rally, leading to a correction.
But what is the reason for this sudden rise in gold prices now, when the Federal Reserve is considering, albeit timidly, lowering rates?
Clearly, demand is rising again. For example, global central banks snapped up 39 tonnes of gold in January, according to early estimates.
To put it in perspective, that's more than double December's refined volumes (16.9 tonnes). At this rate, Citi does not rule out gold reaching $3,000 in the next 12-18 months.
As for the factors expected to provide a boost, apart from the decline in the dollar value due to the Fed's policy review, there are also fundamental factors at play.
In particular, there is a growing debt bubble in the United States. If this figure reaches 140-150% of GDP, there is the potential for an intensified flight to safe assets.
Another aspect to note is the significant disparity in the markets. Excess liquidity, abundant in the capital markets, flowed primarily into equity capitalization and cryptocurrencies.
It is only a matter of time before profit-taking accelerates among investors. A slowdown in the economic or financial sector could trigger it.
Given the Fed's likely rate cut, cash does not look attractive. Investors are left with a choice between bonds and gold.
How long will this uptrend last?
It depends on the circumstances. For example, geopolitical risks and worsening US-China relations will likely continue to fuel the global rise in gold prices.
When it comes to where investors should focus, some analysts recommend shares of gold mining companies. With gold rising above $2200, their profitability improves substantially.
Their prices, therefore, could outperform the underlying asset. Another option is silver exchange-traded funds. However, the final decision should be based on your own research.
P.S. Be aware of support and resistance levels before going anywhere.