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Gold prices hit a new record at $2,338.7 (€2,179.6) per ounce on Thursday, fuelled by increasing tensions in the Middle East.

This is primarily due to the increased possibility of drone or missile strikes by Iran or any of its proxy groups on government and military infrastructure targets in Israel, according to the US and its allies.

If so, this would be a major escalation of the current conflict in the Middle East, started by the Israel-Hamas war. Israel suspects Iran of backing Hamas, as well as the Yemeni Houthi rebels who have been attacking commercial vessels in the Red Sea.

Due to these rising geopolitical worries, investors have fled even more towards gold and other safe haven assets.

Higher inflation and the cost of living in several parts of the world have also contributed to eroding the value of money, thus leading people to invest in inflation hedges, of which gold is a particular favourite.

Fundamentals impacting the price of gold

Market analyst and Euronews contributor, Piero Cingari, said: “Despite concerns over recent higher-than-expected inflation figures, the Federal Reserve remained committed to its projection of three 25-basis-point cuts this year.

“Fed Chair Jerome Powell delivered recent dovish remarks which reinforced market expectations of a rate cut as early as June, already factored in with an 80% liklihood.

“In Europe, the Bank of England witnessed a lack of hawkish sentiment within its board, as no members voted for a hike in its March meeting, contrasting with previous meetings”.  The BoE Governor Andrew Bailey acknowledged the market’s predictions of rate cuts this year as being ‘right’ .

Recording gold’s record trajectory, Russ Mould, investment director at AJ Bell said: “This may be due to how US inflation is proving sticky as the American economy runs hotter than expected, or how central banks continue to acquire the metal to diversify (and perhaps boost the quality of) their reserves. It could also be investors seeking an alternative haven as US Treasury prices slide.

“The divergence between gold prices and US Treasury prices is particularly startling and suggests that commodity and bond markets are starting to price in a rate of inflation that is higher-for-longer, a message that in no way fits with the equity markets’ preferred narrative of a cooling in inflation, a soft landing for the economy and a pivot to interest rate cuts from central banks.”

Chinese demand contributing heavily to gold’s support

China and India are two of the top consumers of gold, especially when it comes to gold jewellery. In 2023, the People’s Bank of China reportedly bought about 225 tons of gold, taking its total reserves up to 2,235 tons.

On the other hand, demand for gold jewellery in India amounted to about 562.3 tonnes in 2023, according to the World Gold Council.

Ross Norman, the CEO of MetalsDaily said: “With available retail savings of about 20 trillion yuan, a stock market in freefall and unrealised property sector losses, gold represents one of the few surefire and dependable investments.

“In January 2024, there was a staggering 271 tonnes of gold withdrawals from the Shanghai Gold Exchange, which is seen as a proxy for local demand. We also hear there have been well above average shipments of gold from the West to the East by security firms, but again, not quite enough to account for the manner and extent of the gold rally.

“But Chinese demand is opaque and news and reporting is often anecdotal. Some import entry point are well-monitored, especially Hong Kong, but other routes, less so. Local premiums are known, but often this can be misleading. High premiums can be because demand is hot, or simply because availability is low,” Norman added.