The gold price climbed to another record high on Tuesday 9 April, passing $2,360 per troy ounce. That’s 28% higher than this time six months ago, according to analysis from BullionVault.
There has been much excitement around the yellow metal so far this year, as investors take advantage of its soaring price and build some valuable diversification into their portfolios.
Investors have also been turning to gold to guard against future interest rate cuts – although a hotter-than-expected inflation figure in the US today could push this further out on the horizon.
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But it’s not just inflation and interest rate expectations that have been driving the gold price. Events in China have been playing a big role too – not to mention geopolitical volatility.
We take a closer look at these factors, before delving into the outlook for gold and how you can invest in it.
How do interest rates impact the gold price?
History suggests the gold price does well when interest rates fall.
This is because central banks typically cut interest rates in an attempt to encourage growth when the economy is stagnating. Stock markets typically struggle in periods like this, so gold can be a good hedge.
What’s more, “gold, which pays no interest, becomes more attractive in a low interest environment”, says Josh Saul, CEO of The Pure Gold Company.
Gold prices have benefitted from falling interest rate expectations in recent months – but they could well see a blip after today’s hotter-than-expected US inflation reading.
The latest data reveals that the US consumer price index (CPI) rose by 3.5% in March, up from 3.2% in February. This was higher than economists were expecting, and will likely result in the Federal Reserve holding rates at their current level for longer.
The Fed’s rate-setting decisions are particularly important in determining the gold price – more important than the decisions made by other policymakers like the Bank of England, for example.
The Federal Reserve will next meet to set interest rates on 30 April and 1 May, but rate expectations are already being adjusted by market participants based on the latest CPI figure.
What’s going on in China?
If we look at demand on a regional basis, it is currently highest in China.
The Chinese central bank has been buying up gold stocks for its reserves for the last year and a half, as it looks to diversify away from other reserve assets like US Treasury bonds.
The Chinese economy has suffered turmoil recently, as the property market crisis wages on. Its stock market has also struggled over this period. Against this backdrop, individual investors have been buying up gold.
“Chinese private households – already the world’s heaviest gold consumer nation – have been spending record sums on gold jewellery, coins and small bars amid the country’s economic slowdown and financial slump”, explains Adrian Ash, director of research at BullionVault.
This has helped push the gold price higher.
Geopolitical turmoil is also driving the gold price
China and interest rates aside, other factors on the global stage are also driving the gold price. Derren Nathan, head of equity research at Hargreaves Lansdown, notes that “continued geopolitical tensions have also been a key contributor”.
The world is currently witnessing turmoil in the Middle East, as well as the continuation of the conflict in Ukraine. Furthermore, vast swathes of citizens across the world will be heading for the ballot box in 2024, with at least 64 countries holding elections, according to Time magazine. This includes the US, and almost certainly the UK too. The latest date the next UK general election can be held is 28 January 2025.
“When we speak to clients about their motivations for buying gold, many of them talk about escalating global concerns, from fighting in the Middle East to the ongoing Russia/Ukraine war”, Saul says. On top of this, “[s]ome are using their gold investment as a hedge against other more risky assets, like bitcoin, falling suddenly in a repeat of previous unexpected and large declines”, he adds.
The yellow metal is considered a safe-haven asset, so investors often flock to it during periods of volatility in an attempt to escape market shocks.
Will gold continue to rally?
As well as interest rates and geopolitical events, the strength of the US dollar has an important bearing on the gold price, so those who like gold in their portfolios will be watching this closely over the coming months. Typically, a weaker dollar drives the gold price up, while a stronger dollar drives it down.
The fortunes of the dollar over the coming months will be closely linked to the timing of the Federal Reserve’s decision to cut interest rates. If the Federal Reserve cuts rates earlier than other major central banks, the dollar could weaken for a period.
However, as we have established, there are a multitude of factors driving the gold price at present. And according to Hal Cook, senior investment analyst at Hargreaves Lansdown, “it feels unlikely that the rally will end anytime soon”.
“Towards the end of 2023, the big question was whether the gold price would stay about the $2,000 level. However, it hasn’t just stayed above this level, it has continued to rally,” he explains. “Perhaps it will be the $2,500 dollar level which might act as a new technical limit for traders,” Cook says, adding that “[o]nly time will tell”.
Ways to get exposure to gold
There are three main ways to invest in gold. The first one is investing in the metal itself through a financial contract, such as an exchange-traded product. See our article on the best gold ETFs.
You can also get indirect exposure by investing in the miners that dig gold out of the ground. This can be done by investing directly in their shares, or by buying a gold fund or investment trust.
Lastly, you can buy physical gold bars or gold coins.
In terms of how much gold to hold in a portfolio, Tom Stevenson, investment director of personal investing at Fidelity International, suggests that around 5-10% is a good amount – which is about the same as you might hold in cash.
“The two offer insurance and dry powder to complement the growth and stability of the shares and bonds that make up the bulk of a balanced portfolio,” he comments.
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