Since October 2023, gold has experienced a significant upward trend, reaching a peak of US$2,450 per ounce on May 20. As of June 6, its price stood at approximately US$2,373 per ounce, substantially surpassing the previous record of US$2,075 per ounce set in August 2020 amid increased demand during the COVID-19 pandemic.
Consumers are enthusiastically embracing the trend. In China, online vendors are offering "gold beans" resembling peanuts and fruits for a hefty US$90 each. Meanwhile, Korean convenience stores stock miniature gold bars no larger than a fingernail, with a 1.87g bar priced at US$170.
While these novelty items may attract casual buyers, serious investors are focusing on the broader picture. The outlook for gold remains positive: Central banks are gradually relaxing monetary policies, reinforcing gold's status as a portfolio diversifier.
Factors Affecting Gold Prices
Geopolitical
When geopolitical tensions escalate, investors typically turn to gold, traditionally considered a safe-haven investment. The recent surge in gold prices has been fueled by renewed tensions in the Middle East and Russia's ongoing conflict with Ukraine.
The upcoming United States presidential elections in November could further elevate the price of gold. If Donald Trump secures a second term, there is a possibility of him initiating another trade dispute with China, as he has hinted at imposing tariffs of 60% or more on Chinese goods. It's worth noting that during the onset and escalation of the US-China trade war in 2018 and 2019, gold prices experienced significant increases.
Global Easing
Another significant factor contributing to the optimistic forecast for gold is the anticipation of a global easing cycle. Various central banks around the world, including those of Brazil, Canada, Europe, Sweden, and Switzerland, have already begun implementing interest rate reductions. It is expected that the US Federal Reserve will also join this trend in the upcoming months of the current year.
The potential for central banks worldwide to adopt an easing stance is predicted to bolster gold prices. Looking back at historical data since 2001, it has been observed that gold prices tend to strengthen following the conclusion of US Federal Reserve rate hike cycles. If this historical pattern holds true, then gold may still have further potential for upward movement once the actual rate-cutting cycle commences.
Central Banks
Central banks have sustained their robust pace of gold purchases, acquiring approximately 1,082 tonnes in 2022 and 1,037 tonnes in 2023. This trend has persisted into 2024, notably led by China, which added 225 tonnes to its reserves in 2023. As of April 2024, China has consistently augmented its gold reserves for 18 consecutive months.
The appeal of gold to central banks endures due to its historical performance during crises, its role as an effective portfolio diversifier, and its high liquidity.
While the outlook for gold remains positive, it is susceptible to the typical fluctuations of financial assets. Market sentiment, monetary policy decisions, economic indicators, and other factors can influence gold prices. Downside pressure on gold prices may arise if the Federal Reserve delays its rate cut cycle, unexpectedly tightens monetary policy, or if geopolitical tensions undergo a significant de-escalation.
Pros and Cons of Gold Investment
The price of gold is closely tied to global events and economic conditions, making it essential to weigh its advantages and disadvantages before incorporating it into your investment portfolio.
One advantage of gold is its reputation as a stable store of value. Since 2001, gold has consistently outperformed most currencies on an annual basis, boasting an average annualized return of 9.7%. However, gold's performance tends to suffer only when the Federal Reserve signals a reduction in quantitative easing policies or increases interest rates.
Additionally, gold is perceived as a reliable asset during times of uncertainty. It has historically demonstrated stability during crises, with positive returns observed across various crisis episodes. For instance, during the 2007-2008 global financial crisis, gold prices surged while stock markets plummeted.
However, it's crucial to remember that past performance doesn't guarantee future results, and the broader economic climate and investor sentiment also influence gold prices, not just specific crises. Diversifying investments across different asset classes, including stocks, bonds, and gold, helps mitigate overall portfolio risk by offsetting losses in one asset class with gains in others.
Despite its advantages, there are drawbacks to holding gold. Gold tends to appreciate in value at a slower pace compared to stocks, potentially resulting in lower returns on investment. Unlike bonds and stocks, gold doesn't generate income through dividends or yield, relying solely on price appreciation upon selling. Moreover, storing physical gold incurs annual storage fees, and there are security risks associated with storing gold at home.
Furthermore, gold's liquidity can be a concern, particularly when selling large quantities quickly, especially during market downturns. Ultimately, gold may not be suitable for all investors, and individuals should assess their risk tolerance, investment objectives, and overall portfolio before considering an investment in gold.
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