Gold Nearing A Record High And It Might Not Stop There

The gold price has been driven higher by three factors: economic concerns, lower bond rates, and a weaker dollar. Central banks have bought gold in droves this year, making this year's rally even more exciting. There is every reason to think that this growth will continue.

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A gold ounce sold on Thursday at $2,041.30 was the second-highest price in history, but it was still less than half a percentage point below the record price of $2,069.40 set in August 2020. There has been an increase of 13% in the price of gold since late February, just before Silicon Valley Bank collapsed. Gold has surged more than 25% since the end of November. Other precious metals have also surged in price recently, including silver, which has increased nearly 30% in one month alone.

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As a result of several high-profile bank failures in the past month, investors have opted to take a flight to safety, raising concerns about the broader implications for the U.S. financial system in general. The demand for gold tends to rise at times of heightened uncertainty, as it is one of humanity's oldest stores of value.

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Despite this, a falling yield on bonds, the steadily weaker U.S. dollar, and other indications of the economy slowly softening are also causing buyers to place bets on bullion, adding to the trend. A pivot point may be approaching for Federal Reserve policy this week, as the consumer price index fell more than expected in March, indicating that policy may be at a turning point in the near future. As the minutes of Wednesday's Fed policy meeting, which were released Wednesday, indicated, the Fed's March policy meeting participants were discussing further interest rate increases, despite the fact that the Fed's tightening cycle is expected to end soon. Bond yields responded accordingly as both points pointed toward the Fed's end of the tightening cycle approaching.

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Since early March, the yields of U.S. Treasury notes have fallen from about 5.1% to about 3.9%. With lower yields, the opportunity cost of holding gold, which doesn't generate income, is reduced. The 10-year Treasury yield has been projected to reach 3.25% by year's end, down from 3.5% at the moment. Capital Economics is a research firm.

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As the dollar has suffered from a decline in the value of the greenback this year, the yield on Treasurys has dropped more rapidly than overseas yields.

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He wrote on Thursday that he expects gold's price to continue to rise. He believes the U.S. economy is likely to enter a recession this year. As a result, along with tighter lending conditions, the Fed should be able to shift toward rate cuts earlier than markets anticipate, alleviating some of the heat from the economy.

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Consequently, bond yields would fall further and gold funds would see more defensive flows.

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A number of private investors have stepped up their gold purchases in the past few months, but they aren't the only one doing so. According to data released by the World Gold Council, central banks around the world purchased 157 tons of gold in the first two months of 2023, the highest level of purchases in a decade for a new year.

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It is common for central banks to keep gold and foreign currencies in their reserves. The U.S. dollar remains the dominant currency, but a growing number of countries are aggressively diversifying their reserves to stimulate economic growth.

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In the first two months of 2023, the Peoples Bank of China has purchased 15 tons of gold and 25 tons of gold in February, respectively, according to the World Gold Council, which says the bank has been buying a lot of gold in recent years. In the first two months of 2023, the Central Banks of Turkey bought together 46 tons of gold, while the Bank of Russia bolstered its reserves by 31 tons in February after having sat out January. Data for March has not yet been published.

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The fractured global economy is likely to lead to this trend continuing in the coming years as economies like China and Russia move toward reducing their dependence on the dollar, according to Saunders.

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The world gold council has announced that gold fund flows have turned positive in March. According to data provided by the World Gold Council, gold exchange-traded funds' assets increased by 32 tons during the month of March.

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Although gold's current price is at a near-record only in nominal terms, gold is still a long way off from a gold peg that was seen back in 1980 when it topped out at more than $3,000 in today's dollars when adjusted for inflation. Gold peaked at more than this in 1980. It had been ten years since the United States left the gold standard, and it was during a period of high inflation and recession when inflation was rising.

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There is no chance that gold could reach a price of $3,000 any time soon. But with bond yields, the dollar, and a positive outlook for investors, the price of gold may still have some room to increase.