Despite an absence of crisis, gold prices can soar, as the recent breach of the $2,000 per ounce mark illustrates. This significant milestone required a confluence of factors – the global pandemic, Europe’s worst war since World War II, and an impactful US banking sector crash.
Now, amid a global real estate slump, persistent inflation, geopolitical tensions over Taiwan, and Washington’s ongoing debt ceiling stand-off, gold might maintain or exceed this high price point.
Rising Gold Prices
Gold prices have already increased by 5% from the £1,580 triple-top in British Pounds ($1,956), kicking off May with new all-time highs in numerous currencies including Yuan, Yen, and Rupees. Despite these soaring figures, gold has managed to fly under the radar, failing to garner front-page headlines as it did during the financial crisis of 2011.
This latest surge in gold prices, strangely enough, has not ignited a frenzy among the usual market speculators. Comex gold futures and options have seen increased activity, but are nowhere near the frantic levels of late-2019. Gold-backed ETFs are cautiously approaching a third year of contraction, shrinking in 2021 and 2022, with further slight outflows in 2023.
Contrary to what might be expected, central banks are driving this price surge. Led by emerging market gold-buying giants China and Turkey, sovereign states fearing or already facing US-EU sanctions are making significant gold purchases, as detailed in a paper for the IMF by economic historian Barry Eichengreen among others earlier this year.
These acquisitions are not just being parked in the London vaults but are instead hoarded domestically. Since Russia’s invasion of Ukraine, central bank gold holdings globally have risen by 580 tonnes, but London’s commercial vault holdings fell by 191 tonnes in the year-to-March.
This behavior indicates a growing mistrust between ‘the West and the rest’, and emphasizes the need for the gold market to retain its appeal to international customers. As part of this effort, the LBMA is prepared to consult on updating and clarifying the UK’s VAT Terminal Markets Order, as announced by HM Treasury last month.
Gold prices would need to reach above $2,400 to top 2011 or 2020 highs in real terms, and a $3,200 price point would equate to the 1980’s peak against the US Consumer Price Index.
Gold still has a long way to go, and it offers plenty of room for retail investors and speculators to re-enter the market, possibly driving prices higher. Despite the current high prices, the continued and complex global challenges could potentially provide the momentum required for gold to push beyond its current record levels.
Conclusion
In conclusion, the landscape for gold investment appears to be shifting. Despite a lack of retail frenzy and a contraction in gold-backed ETFs, gold prices are not just weathering the storm of rising interest rates, they’re hitting new record levels.
The increasing demand from emerging-market central banks and sanction-fearing nations is particularly noteworthy. They’re not only buying gold, but they’re also keeping it close to home, indicating a distrust between ‘the West and the rest’. This paints a compelling picture of the role of gold as a safe haven in an increasingly uncertain world.
Still, with current prices well below the inflation-adjusted peaks of yesteryears, there remains plenty of room for retail and institutional investors to enter the market and potentially push prices even higher.
What factors might drive the price of gold to reach or surpass the equivalent of its 1980 peak, and what are the prospects for gold to reach these levels in the foreseeable future?
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