Three linked forces propel gold to a record price: economic concerns, falling bond yields and weakening of the US dollar. An increase in buying this year by central banks has fueled the recovery. Tailwinds look set to continue.
The price of gold stood at $2,041.30 an ounce on Thursday, the second-highest in history and about half a percentage point below the August 2020 record of 2,069. .40 dollars. The yellow metal has gained 13% since the end of February, before the bankruptcy of Silicon Valley Bank. Gold is up more than 25% since November. Other precious metals have rallied even more lately: the price of silver has jumped almost 30% in one month.
There has been a flight to safety among investors over the past month, spurred in part by several high profile bank failures and concerns about the broader implications for the US financial system. Gold is one of mankind’s oldest stores of value, and demand tends to increase in times of heightened uncertainty.
But it is not only the fear of bank failures that encourages buying. Falling bond yields, a weaker US dollar and other signs of a slowing economy are also pushing bullion buyers. The past week has provided more evidence that Federal Reserve policy may be approaching a pivot point: headline inflation fell more than expected in March, as measured by the consumer price index, and March Fed policy meeting minutes, published on Wednesday, revealed more debate among meeting participants about continuing interest rate hikes. Both pointed to an imminent end to the Fed tightening cycle, and bond yields adjusted accordingly.
The yield on the two-year US Treasury fell to around 3.9% from 5.1% in early March. Lower bond yields reduce the opportunity cost of holding gold, which produces no income. Capital Economics, a research firm, has an end-of-year target for the 10-year Treasury yield of 3.25%, down from its current yield of 3.5%.
The fall in US Treasury yields this year has been greater than the fall in many overseas yields, which has weighed on the dollar. An ounce of gold is worth more dollars when the value of the greenback decreases.
Bradley Saunders, deputy economist at Capital Economics, expects continued strength in the price of gold. “First, we believe the U.S. economy will enter a recession this year,” he wrote Thursday. “This, combined with tighter lending conditions, should help dampen some of the heat in the economy, allowing the Fed to move into rate cuts sooner than markets expected.”
That would mean even lower bond yields and more defensive flows into gold funds.
Private investors were not the only ones to step up their purchases of gold this year. Data from the World Gold Council showed that central banks around the world acquired 157 net tonnes of gold in the first two months of 2023, the fastest pace of purchases at the start of the year in a decade.
Central banks often hold foreign currencies and gold in their reserves. The US dollar remains dominant, but more and more countries are trying to diversify their reserves.
The People’s Bank of China has been a big buyer of gold, adding 15 tonnes in January and 25 tonnes in February to its reserves, according to the World Gold Council. The Central Bank of Turkey bought a total of 46 tons of gold in the first two months of 2023. The Bank of Russia increased its reserves by 31 tons in February after being absent in January. March data is not yet available.
“We believe this will continue as the fractured global economy prompts economies such as China and Russia to attempt to reduce their dependence on the dollar,” Saunders wrote.
Flow of gold funds turned positive in March. Assets of physically backed gold exchange-traded funds rose 32 tonnes last month, according to data from the World Gold Council.
Of course, the current price of gold is at a near record only in nominal terms. In real terms, adjusted for inflation, gold is still a long way off. In 1980, gold peaked at an inflation-adjusted price of over $3,000 in today’s dollars. It was a decade after the United States left the gold standard and a period of rising inflation and recession.
A gold price above $3,000 is probably not anytime soon. But with bond yields, the dollar and investor sentiment all working in its favour, the price of gold may have more room to maneuver.
Write to Nicolas Jasinski at email@example.com