What is driving gold’s rise?

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.

This article was written by FL Contributors at www.forexlive.com.