Exploring the Factors Behind Gold’s Gradual Climb to $2,000

If you’ve heard anything about the gold industry in the last few weeks, you know gold is breaching record prices and excelling all analyst predictions for the year thus far. Gold’s current trading prices are just a hair away from settling at an all-time high, though they already moved above the $2,000-per-ounce line a few weeks ago, and have been mostly maintaining it since. Gold hasn’t even touched the $2,000 level since over a year ago in early 2022, when Russia invaded Ukraine.

The most significant aspect of this price climb is how long it took to occur. Gold has spent quite some time “trying to establish itself above the $2,000 level,” according to the State Street Global Advisors’ chief gold strategist, George Milling-Stanley. “The macroeconomic and geopolitical background has been very favorable for gold for over a year,” he explains in an interview with MarketWatch.

So why is spring 2023 finally the time that gold can rise above this stubborn line? Quite a few factors contribute to gold prices, and the current economic and market conditions are creating what many consider to be the perfect storm for gold to take over.

The primary factor contributing to gold’s rise is inflation. The current inflation rate is at a 40-year high and the Federal Reserve’s attempts to calm it show no promising results. In fact, many of these efforts have only over-corrected the market, causing even worse economic conditions, with the prime example being what occurred at SVB Financial.

The high inflation rates and banking crises are not just America’s problems; they’re a global concern. After the Federal Reserve hiked interest rates to combat inflation, one of the largest banking institutions in the United States, SVB Financial, collapsed, then just days later, one of the largest in the globe lost 30% of its shares causing a trickling effect of failures throughout Europe. Between the global inflation rates rising and creeping banking fears, a global recession could begin any minute now, meaning it’s “high time gold responded appropriately,” Milling-Stanley claims.

The highest-yielding gold futures contract settled at $2,038.20 per ounce last Tuesday, displaying the highest price mark since March 2022. Prices on Wednesday traded at 2,038.40, just a few ticks away from the record high mark in August 2020 of $2,069.40.

This steady, yet fierce, increase in gold prices is “not surprising given the increase in geopolitical tension,” Joy Yang, MarketVector Indexes’ global head of index product management, explains. “This was always going to be a contributor to gold price volatility in 2023.”

The worse the economy gets, the better gold looks to investors. As other asset classes fail, individuals, banks, and government entities alike seek a safer way to protect their wealth. Gold is the answer.

“Markets are struggling with uncertainty, and inflation is back in pole position, but markets are split in Fed interest rate direction,” Yang explains to MarketWatch. “Gold is a good hedge for either outcome.”

While some believe the banking crises may be over now, the credit risk is far from resolved, which means “economic fragility” will only continue, Yang explains further.

Additional conditions that contribute to gold’s climb include factors that affect the weakening U.S. dollar, like the poor U.S. economic data released recently displaying high unemployment rates or the oil supply shock. The ICE U.S. Dollar index dropped by 0.7% this week alone. Gold rises when the U.S. dollar falls because people want to protect their purchase power.

Demand for gold only continues rising, but the supply stays the same, creating the perfect pricing environment, according to Yang. And it’s not just investors spiking the demand levels. “Central banks have been piling into gold,” she explains.

In 2022, central banks around the globe purchased more gold than ever before, with a total of 1,136 tons purchased.

A new demand sector for gold is also on the rise as AI has gained traction in recent months, with gold being an “underlying component of AI applications,” according to Yang.

Yang’s outlook on gold prices “looks optimistic,” considering all of these factors. Gold futures remain 11% higher after breaching $2,000 for the first time in almost a year. Milling-Stanley believes “[gold] fully deserves to be above $2,000 in the current circumstances.”

While many short-term factors are currently contributing to gold’s price jumps, stable long-term demand sectors also keep its price steady, maintaining its status as a reliable investment option. As always, investors should consult their financial advisors before making any portfolio decisions.

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