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Gold has surged by 14% year-to-date, outpacing the 10% rally of the S&P 500 this year. Gold futures peaked at an all-time high of $2,413 per ounce on 19th April, while spot gold reached a fresh peak of $2,1392 per ounce on the same day. Following a two-week retracement, the precious metal’s price saw a swift rebound last week, rising by $60 per ounce to surpass $2,360 on Monday. It’s notable that gold’s price was just above $1,800 per ounce at its recent lows in early October 2023.

From an investment perspective, gold is typically favoured during uncertain times, such as financial crises, war, and a high inflationary environment. Investors tend to hold gold to preserve value and hedge against economic downturns. Tactically, gold prices exhibit a negative correlation with the US dollar. Gold prices tend to rise during a weakening of the dollar and decline when the dollar strengthens. In the final quarter of 2023, speculation regarding the US Federal Reserve Bank (Fed) cutting interest rates has significantly increased, leading to a downturn in the greenback and driving up gold prices.

However, this year has seen a notable departure from the typical negative correlation between gold and the US dollar, with both experiencing upward trends. This uncommon alignment may be attributed to the heightened military conflict in the Middle East, which bolstered demand for safe-haven assets in April. However, this may have just been a temporary cause. An increase in central banks’ gold reserves and retail investors’ passion for gold have both contributed to the price surge.

According to the World Gold Council, central bank purchases have been one of the primary drivers of gold prices in the past two quarters. Demand from central banks for gold reserves surged to 23% of total demand, up from an average of 10% over a 10-year period. While the US remained the largest holder of gold reserves, Turkey and China saw the largest increases by 30.12 tonnes and 27.06 respectively in the first quarter. Meanwhile, the top six holders of gold reserves are the US, Germany, Italy, France, Russia, and China, with US holdings significantly surpassing those of other countries, standing at 8,133 tonnes compared to Germany’s 3,352 tonnes in second place.

Additionally, the surge in gold prices may be attributed to robust demand from individual investors, particularly a notable increase in demand from the Chinese markets. Over-the-counter (OTC) investment played a significant role as the second primary contributor to the rise in gold prices. OTC purchases typically involve transactions directly between parties, and in China, demand for bars and coins surged by 68% year-on-year in the first quarter. This surge might be a response to the devaluation of the Chinese yuan and the economic uncertainties, which led to increased demand for gold as a means of preserving wealth. Furthermore, seasonal demand spikes during the Chinese New Year period may also have contributed to the increase in demand for gold.

With gold prices reaching record highs, speculative purchases may have been another significant driver of the price surge. A notable phenomenon is that retail investors tend to buy into the rally, while institutional investors reduce long positions to capitalise on profits. This dynamic may explain why gold prices have continued to rise, even though gold ETFs experienced outflows during the first quarter. Moreover, news and reports about surging gold prices may have contributed to a fear of missing out (FOMO) effect among smaller investors.

While China’s strong demand may persist as the government continues to implement stimulus policies to aid the economy, signs of relaxation in global liquidity could continue to support the upside momentum of gold.

Although China’s demand has been a key factor in the gold rush, the negative correlation between gold and the US dollar may return when the Fed commences its rate cuts. As the dollar softens, gold becomes relatively cheaper for other currencies, potentially boosting liquidity and further driving up gold prices. However, individual investors may also need to exercise caution regarding potential market hype surrounding the precious metal at this juncture.

This week, the US is set to release the monthly CPI data for April, a critical economic gauge for the Fed. If inflation stays sticky, it could cap gold price gains. This outcome may occur as hotter-than-expected CPI data may strengthen market expectations for “higher-for-longer” interest rates, consequently bolstering the US dollar.