The price of gold hit a record high this week, peaking as bitcoin also hit its all-time high and shortly thereafter the S&P 500 topped 5,000 for the first time.
Spot gold was trading at $2,160 per troy ounce on Thursday afternoon, up more than 8% since mid-February and well above the previous record, set in December, when gold hit $2,135 per troy ounce .
What is going on? For one thing, gold tends to have an inverse correlation with the US dollar, whose value has weakened over the past three weeks due to the Federal Reserve’s ambiguity over interest rate cuts. In turn, this has helped push gold to its current all-time high.
How Fed Policy Affects Gold Prices
Overall, gold is benefiting from optimism about US monetary policy and investors’ hopes for lower interest rates.
Federal Reserve Chair Jerome Powell provided clarification on Wednesday, saying interest rate cuts are possible “at some point this year” if the economy moves as expected and inflation continues to cool. Typically, gold prices rise as interest rates fall, a development that could occur sooner than some analysts expected.
According to the CME Group’s FedWatch Tool, there is a 73.9% chance that the central bank will cut the federal funds rate at its June meeting. This could serve as an ongoing catalyst for gold prices in the second half of the year.
More reasons why gold is up right now
Physical gold does not provide returns like dividend stocks or interest-bearing debt instruments like certificates of deposit or Treasuries, so there is an opportunity cost to holding it when bond yields are high. However, recent declines in the 10-year Treasury yield – which at the current rate of 4.11% is down 17.6% from a one-year high – are supporting gold prices as investors seek stronger potential gains than those currently offered by Treasury securities.
Additionally, investors are often attracted to gold because it functions as a safe haven asset and often performs well when global markets are volatile. Part of the recent rise in the price of gold could be attributed to geopolitical conflicts, including the wars in Ukraine and Gaza.
Another factor that supported prices was the purchase of gold by central banks starting from 2022, especially by China, which increased demand for the precious metal. This trend continued through 2023 and carried into 2024 with central banks reporting that they increased gold reserves by 39 tons in January, more than double the amount purchased in December and the eighth consecutive month of purchases net.
Should investors buy gold?
Gold can be a useful asset for diversifying an investment portfolio, but financial advisors recommend investing no more than 5-10% of your money in the metal. Even though gold is performing well, there are risks that prices could fall if inflation numbers are high or if employment numbers turn hot, for example.
However, as a store of value, the precious metal often benefits long-term investors over short-term speculators, the former of which may involve purchasing the physical metal or investing in stocks such as shares of gold mining companies. gold and gold leveraged exchange-traded funds. .
Ultimately, whether or not to include gold in a portfolio should be based on personal investment preferences and financial goals, but investors could expect a strong year for the bright yellow metal.
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