How high can the price of gold go?

In the world of investments, gold is once again all the rage. On Monday, the spot price hit an all-time high of $1,945 per ounce in the intra-day trade after rising for seven consecutive weeks. 

The surge comes on the back of a weakening US dollar, US-China trade tensions and low interest rates which are near zero - giving investors a reason to find assets that appreciate in value. Gold has not disappointed. 

While gold does not yield interest like other financial instruments such as a bond, it tends to increase in value in times of turmoil. And there’s no shortage of that these days. 

The coronavirus pandemic, which has battered economies around the world, and killed more than 648,000 people, has forced central banks to slash interest rates. Trillions of dollars have flooded the markets as part of stimulus programmes.

When so much money floods the markets, there’s always concern that it will stoke inflation and result in currencies to fall. In such circumstances, gold is always a good hedge. 

The last time the gold price was this high was in 2011. That peak also followed a bad time for the global economy after the 2008 recession. The period also saw governments and central banks pumping money into the markets.  

Demand for gold generally goes up in times of uncertainty as people move savings to more secure assets that preserve their value for a longer duration. 

Analysts at the Bank of America in April even predicted that in 18 months the price could hit $3,000 an ounce or 28.3  grams, the result of an ever-devalued currency given the rate at which central banks are printing money. 

A close link

During these last few pandemic-hit months, the price of gold has closely responded to the economic outlook and news coming out of the US.  

This week, the US Federal Reserve System, or the Fed, is meeting to decide the interest rate. Analysts expect that it will keep the rate at the current level, which is close to zero. 

In early June, gold enthusiasts were disappointed when the price plunged suddenly, mainly because of reports of improvement in US unemployment numbers. 

But now, trade tensions between US and China, two of the world’s largest economies, are weighing heavily on the minds of investors. This month, both sides forced one of each other’s foreign consulates to be shut. 

Washington accuses Beijing of intellectual property theft and has led a campaign to restrict the Chinese telecommunications giant Huawei from getting 5G contracts in other countries. 

China says it has closed the US consulate in Chengdu in a tit-for-tat reaction. 

Shifting trends? 

Historically, the price of gold has been driven by households in countries like India, the world’s second-largest buyer of the precious metal, spending over $28 billion importing gold last year. 

Indian households save roughly 30 percent of their income. A large part of that goes into buying gold. For many, that’s not even spending, but simply an investment to preserve their wealth. 

The belief that the price of gold will continue to rise is at the heart of the sustained Indian interest in the metal. The coronavirus pandemic, however, has dampened its demand to what could be a 30-year low. 

Between April 2019 and March 2020, India spent $28 billion on importing gold, a 14 percent drop from the $32.9 billion in the previous year. 

The main driver behind demand is Indian weddings - it is when parents give gold jewellery to their daughters, and relatives and friends buy it as gifts. 

More than 50 percent of India’s gold demand originates from weddings, according to some estimates. Many weddings were postponed due to the pandemic. 

On the other hand, the current surge in price is driven by the investment that is going into the gold-backed exchange traded funds (ETFs). 

In the first half of this year, more than $39 billion has gone into gold ETFs, “significantly above the highest level of annual inflows, both in tonnage terms (646t in 2009) and US-dollar value (US$23bn in 2016),” according to the World Gold Council.

So while it is still too early to say how high the gold price will rise, a lot depends on the economic outlook in the next few months.