Gold prices surged to a new record high of $2,077.84 per ounce on Monday, surpassing the previous intraday peak of $2,072.50 set in August 2020. The yellow metal has gained more than 10% this year as investors seek a haven amid rising inflation, geopolitical tensions, and uncertainty over the Federal Reserve’s policy stance.
Inflation worries boost gold’s appeal
One of the main drivers of gold’s rally is the persistent inflationary pressure in the US and other major economies. The US consumer price index (CPI) rose 6.2% year-on-year in October, the highest since 1990. The core CPI, which excludes food and energy, increased by 4.6%, the most since 1991.
Inflation erodes the purchasing power of fiat currencies and reduces the real returns on bonds and other fixed-income assets. This makes gold, which is seen as a hedge against inflation and currency debasement, more attractive for investors.
Some analysts expect inflation to remain elevated for longer than the Fed anticipates, as supply chain disruptions, labor shortages, and strong consumer demand continue to push up costs. According to a Reuters poll, economists see US inflation averaging 5.2% this year and 3.0% next year, well above the Fed’s 2% target.
Fed’s policy outlook remains unclear
Another factor supporting gold is the uncertainty over the Fed’s policy outlook, as the central bank faces a delicate balancing act between fighting inflation and supporting the economic recovery. The Fed announced in November that it would start tapering its monthly bond purchases by $15 billion, from $120 billion to $105 billion, and indicated that it could raise interest rates sooner than expected if inflation persists.
However, the Fed also stressed that tapering is not a prelude to tightening and that it would be patient and flexible in adjusting its policy stance. The Fed’s chair, Jerome Powell, who was recently nominated for a second term, reiterated that the central bank would not overreact to inflation and would consider a range of factors before raising rates.
The mixed signals from the Fed have left the markets guessing about the timing and pace of its policy normalization. Higher interest rates tend to weigh on gold, as they increase the opportunity cost of holding the non-yielding metal and boost the dollar’s appeal. However, if the Fed is seen as behind the curve in tackling inflation or if it tightens too abruptly and triggers market turmoil, gold could benefit from its safe-haven status.
Geopolitical risks add to gold’s allure
Gold also found support from the heightened geopolitical risks in the Middle East as the conflict between Israel and Hamas escalated in recent weeks. The violence has raised fears of a wider regional war, involving Iran and other actors, that could disrupt oil supplies and destabilize the global economy.
Gold is often used as a store of value and a hedge against geopolitical uncertainties, as it tends to retain its value in times of crisis. The precious metal has also been boosted by the increased demand from central banks, especially in emerging markets, that seek to diversify their reserves and reduce their reliance on the dollar.
The gold outlook remains bullish
Looking ahead, analysts expect gold prices to remain above $2,000 and possibly hit $2,100 next year, as the fundamental factors that support the metal remain intact. However, they also warn of some downside risks, such as a stronger dollar, a faster-than-expected Fed tightening, or a resolution of the geopolitical tensions.
According to a Bloomberg survey, the median forecast for gold prices at the end of 2024 is $2,075, with the highest estimate at $2,300 and the lowest at $1,650. The survey also shows that analysts are more bullish on gold than on silver, platinum, or palladium, which are more sensitive to industrial demand and environmental regulations.
Gold prices have shown remarkable resilience and strength this year, despite the headwinds from the pandemic, the Fed, and the dollar. The metal has proven its role as a reliable hedge against inflation, currency debasement, and geopolitical risks, as well as a diversifier for portfolio allocation. As long as these factors persist, gold is likely to shine brighter in 2024.
