Gold continues to hover near all-time highs, driven by a weakened US dollar, uncertain global economic outlooks, and escalating geopolitical tensions. The rally shows no signs of slowing, as upcoming central bank decisions may further boost demand.
ADVERTISEMENTGold prices hovered near all-time highs ahead of key central bank rate decisions this week. Gold futures surpassed $2,600 (€2,360) per ounce for the first time last Friday and maintained that level on Monday, despite a slight pullback.
Meanwhile, spot gold reached a high of $2,589 per ounce before easing to $2,577 (€2,340) during Tuesday’s Asian session. The precious metal has surged over the past seven months, gaining more than $500 (€454) per ounce, or 24%, since breaking through the critical $2,080 (€1889) mark in March.
This week’s focus will be on interest rate decisions from three major central banks: the Federal Reserve, the Bank of England, and the Bank of Japan. Gold is likely to remain in the spotlight, as ongoing uncertainties around global economic growth could further influence its momentum.
The key driver of gold surge: A softened USD
The US dollar’s recent weakness has been a key driver behind the surge in gold prices over the past few months.
The US dollar index (DXY), which measures the greenback’s value against a basket of six major currencies, has declined by 5.7% since its peak in April, falling to just above 100 – a level not seen since December 2023.
The dollar index has hovered near this low for the past three weeks, as growing expectations mount for the Federal Reserve to deliver a significant 0.5% rate cut at its upcoming meeting on Wednesday.
The 100 level is a critical psychological threshold for the USD index. Should it fall below this mark, the US dollar is likely to weaken further, potentially fuelling another rally in gold prices.
This is due to the inverse relationship between gold prices and the value of the US dollar, as well as interest rates. A weaker dollar makes gold more affordable in other currencies, driving up demand.
Additionally, lower interest rates reduce the appeal of interest-bearing assets like cash, making gold a more attractive store of value.
Furthermore, progress by the Bank of Japan in tightening its monetary policy could strengthen the Japanese yen and further weaken the US dollar. This could lead to heightened market volatility and an increased demand for safe-haven assets such as gold.
Risk-aversion sentiment keeps gold at a record level
Gold is widely regarded as a traditional safe haven asset, known for maintaining or increasing its value during periods of economic uncertainty, market volatility, or geopolitical instability.
Recent events, such as the conflicts in the Middle East and the ongoing war in Ukraine, have further contributed to these uncertainties, driving demand for gold.
The global economic landscape has also played a crucial role in supporting its price surge. As highlighted by the World Gold Council: “An increasingly complex geopolitical and financial environment is making gold reserves management by central banks more relevant than ever.”
Economic data shows a significant slowdown in global growth, with Europe’s major economies stagnating, China’s economic recovery faltering, and the US experiencing softer growth.
As central banks shift away from aggressive rate hikes, concerns about economic slowdowns and potential recessions have intensified. Rising geopolitical tensions, coupled with a weakening labour market and declining consumer spending, have added to the unease.
ADVERTISEMENTIn 2023, many Western central banks abruptly halted their quantitative easing (QE) programmes and embarked on aggressive rate hikes to combat inflation. However, the fight against inflation has come at the cost of economic growth, particularly in the eurozone.
Concern about worsening economic conditions in US
Investor nerves are heightened regarding the US economy’s ability to achieve a soft landing, as recent data points to a marked slowdown in the labour market.
The brief inversion of the US government’s 10-year and two-year Treasury yields last month – typically a warning sign of an impending recession – has also fuelled concerns. A deep rate cut by the Federal Reserve could signal urgency to lower interest rates in response to worsening economic conditions.
Moreover, several developed economies, including Germany, the UK, Japan, and New Zealand, have slipped into technical recessions in 2023 and 2024, defined as two consecutive quarters of negative GDP growth.
ADVERTISEMENTThe combination of economic and geopolitical factors is likely to keep gold at the forefront as a secure investment option.