Why Is the Price of Gold Rising? 6 Possible Reasons

Since the global financial market meltdown at the height of the coronavirus pandemic, gold has rallied to an all-time high of $2,089.20 per ounce. So far this year, the yellow metal has surged approximately 23%, and the consensus on Wall Street is that gold could hit between $2,100 and $2,200 by year’s end. Despite a technical correction in September, the gold bulls think there is more room for growth.

Legendary investor Jim Rogers has quipped that gold is in a 5,000-year-old bubble. Prices have fallen short of some of the ultra-bullish forecasts over the years – like $5,000 – but gold has withstood the bull and bear markets, allowing seasoned and neophyte investors to seek shelter or make profits.

Although Wall Street has dismissed gold for years, some of the biggest investment houses have poured billions into the precious metal, whether physical ownership or mining stocks. Indeed, there might be some bumps along the way, but gold still has plenty of legs when inflation becomes the new normal. In fact, it might be a good idea to invest in gold for cash with the expectation of its price continuing to rise.

But why are gold prices rising? Let’s explore the several different reasons behind the precious metal’s ascent in 2020 – and beyond:

1. A Weaker U.S. Dollar

As usual, the price of gold is rising because of the investment market. At the start of the market mayhem, investors were fleeing to the greenback, which is traditionally a safe-haven asset. Investor demand helped lift the U.S. Dollar Index, a measurement of the greenback against a basket of currencies, to 103.00. In the following months, the index cratered more than ten per cent.

While the index has recovered nearly 2% in September, the sentiment is that the buck could be on a permanent downward trend due to the trillions of dollars in fiscal and monetary stimulus and relief.

A weaker buck is generally good for dollar-denominated commodities because it makes it cheaper for foreign investors to purchase.

2. Ultra-Low Interest Rates

The major central banks around the world have committed to ultra-low interest rates to support the economic recovery. The Federal Reserve has said it would keep rates near-zero until at least 2023, the Bank of Canada (BoC) has signaled it would not pull the trigger on a rate hike for a few more years, and the Bank of England (BoE) is studying subzero interest rates. While this is troubling news for savers and retirees, it is good news for borrowers, investors, and even gold bugs.

A low-rate environment is good for the metal asset class since it diminishes the opportunity cost of holding zero-yielding bullion. In other words, if you cannot earn interest on a bond or in a savings account, then your only other alternatives are to buy stocks and build positions in bullion.

3. Inflation Woes

Indeed, there is no inflation if you do not eat food, live under a roof, seek medical care, and attend a college or university. The official consumer price index (CPI) has been relatively unchanged during the pandemic, but the stuff that you need has increased significantly. When the cost of living becomes more expensive, and your currency depreciates in value, gold and silver become the go-to investments.

The U.S. central bank recently modified a long-standing monetary policy objective. For years, if there had been a substantial increase in inflation, the Fed would raise interest rates. This occurred in the 1980s when there was double-digit inflation, and then-Fed Chair Paul Volcker hiked rates to contain the inflation surge. The Fed is adopting a new approach by allowing inflation to exceed its two per cent target rate.

4. Market Uncertainty

Despite the Dow Jones Industrial Average recovering, and the Nasdaq Composite Index and the S&P 500 hitting all-time highs, there is still plenty of uncertainty on stock exchanges everywhere. From the COVID-19 public health crisis to fiscal stimulus to consumer spending, there is a laundry list of risks and uncertainties that push traders into safe-haven assets, including the yellow metal.

5. Industrial Demand is Rising

Many novice investors think gold is a shiny metal that you look at in your safe. However, gold is a natural resource that maintains a diverse array of industrial uses, such as computers, electronics, dentistry, medicine, aerospace, and glassmaking. Since the global economy is in a recovery phase, albeit at a sluggish pace, there is more demand for the precious metal.

“The market’s expectation of where inflation’s going to be relative to where interest rates are going to be,” Guy Foster, head of research at Brewin Dolphin, recently told CNBC. “And the trade here is to say that the Federal Reserve and other central banks will not be able to raise interest rates because of high unemployment, even as inflation starts to pick up.”

6. Negative Real Yields

As economists assess gold’s upward trajectory of the last few months, they are trying to understand why gold spiked. One of the chief causes, according to Citigroup, is that central banks’ monetary easing campaigns resulted in negative real yields. Put simply, investors’ return on bonds has been equal or below the rate of inflation, which ties into a previous point about ultra-low interest rates.