CNA Explains: Why the price of gold has surged and where it could go from here

SINGAPORE: On Dec 4, the price of gold hit an all-time high, with the precious metal trading at more than US$2,100 (S$2,820) per ounce.

This surpassed the previous record price of US$2,075.47 an ounce set in August 2020, when the COVID-19 pandemic boosted demand.

Gold has been seen as a store of value for thousands of years. And for modern-day investors, it has long been viewed as a safe haven amid volatility in other markets. 

So what has pushed gold prices to their recent levels? And will they stay there? To find out, CNA spoke to experts from three banks and two bullion dealers.

What affects the price of gold? 

When determining the price of gold, multiple factors come into play. 

The supply of available gold, market volatility, central bank decisions and the value of the United States dollar all affect the demand for the precious metal, which in turn drives prices up or down.

Geopolitical tensions have an impact as well, as do concerns about inflation.

CEO and founder of bullion dealer Silver Bullion Gregor Gregersen told CNA that "most gold gains tend to occur during recessions, stagflations and crises because, as confidence ebbs, people turn to physical gold as a safe haven".

"We view physical gold and silver as long-term holdings which will do particularly well in times of crisis and stagflations," he said.

Why did the price of gold reach its recent highs?

Spurred on by remarks from US Federal Reserve Chair Jerome Powell on Dec 1 that suggested the US central bank could cut interest rates in early 2024, gold prices saw a new high on Dec 4.

Mr Powell's comments that US monetary policy was "well into restrictive territory" elevated confidence in investors. 

The precious metal jumped 3.1 per cent to US$2,135.39 an ounce in early Asian trade before falling back, AFP reported. 

Despite the impact of Mr Powell's words, experts told CNA that the surge in prices was likely due to a combination of factors coming together.

DBS Chief Investment Office investment analyst Goh Jun Yong said that falling treasury yields, moderating US dollar strength and persistent central bank buying contributed to Dec 4's gold prices. 

He also pointed to the ongoing war in Gaza as a contributing factor. 

"The Israel-Hamas conflict definitely added a dimension of geopolitical risk to the equation; as a safe haven asset, gold usually does well in times of conflict and unrest," said Mr Goh. 

However, OCBC's head of wealth advisory Aaron Chwee said that tensions in the Middle East impacted prices "to a much lesser extent" compared to other variables. 

He instead attributed the increased prices to strong demand from Asian central banks, such as those of India and China. 

The world's two biggest gold buyers, China and India account for more than half of total global demand.

According to the World Gold Council (WGC), central banks bought 800 tonnes of gold in the first nine months of 2023. This is the highest figure for the period according to WGC's records, which go back to 2000. 

"This strong buying streak from central banks is expected to stay on course for the remainder of the year," said WGC in a statement earlier this year. 

Singapore was the third-largest buyer of gold in the world behind China and Poland in the first nine months of 2023, according to WGC.

Mr Chwee added that "growing concerns of a possible US recession" were also behind the surge.

Mr Gregersen highlighted the missile attacks on commercial ships in the Red Sea as a factor in the jump in prices.

"If this shipping route is interrupted it will profoundly affect the global economy," he said.

Mr Ronan Manly, a precious metals analyst at another bullion dealer, BullionStar, said that two earlier record-high prices contributed to what happened on Dec 4.

"(It) was caused by momentum trading in thin illiquid markets before Asia had opened and was triggered by an all-time record high in the monthly close gold price (on Nov 30), and an all-time record high in the weekly close gold price (on Dec 1)," he said.

"Importantly, this November all-time record close signalled a breakout in the gold price on a monthly basis, and drove the momentum which carried on in (Dec 1's) trading session where the gold price continued higher to record a weekly – and daily – all-time high close of a then staggering US$2,072.

"All of these records of monthly, weekly and daily all-time highs in the gold price signalled a gold price breakout, which triggered the price to shoot up."

Why did the price surpass other recent peaks?

While gold prices tend to soar during times of instability, the surge last week surpassed highs seen in the early stages of the COVID-19 pandemic and when Russia launched its invasion of Ukraine. 

As previously mentioned, the last record high was set in August 2020, and when Russia invaded on Feb 24, 2022, gold surged to highs not seen since late 2020, trading at more than US$1,960 an ounce according to CNBC. The price would eventually top out past the US$2,000-an-ounce mark in early March 2022 according to WGC data.

Prices again trended upwards from March 2023 amid turmoil in the banking sector.

So why has the ongoing surge taken the price of gold beyond those peaks?

"During the series of bank collapses earlier this year, rates and the dollar were still rising, which made it fundamentally a non-conducive environment for gold," Mr Goh said.

"Similarly, when the Russia-Ukraine war and COVID-19 happened, rates were much lower than they are today, limiting the potential upside from any rate cuts.

"Today, however, with policy rates at 5.5 per cent, there is significantly more room for future rate cuts, which in turn spells upside for gold."

Mr Chwee said that "the case for holding gold is not solely for safety but it also depends on interest rates, which is the opportunity cost for investors to hold gold". 

He also pointed out that interest rates were low for most of the COVID-19 pandemic and part of the Russia-Ukraine war, and started to move higher in 2022. 

"This made gold less attractive than placing money in deposits and bonds due to the rising interest rate environment," added Mr Chwee.

"However, we are currently in a high interest rate environment and looking at the possibility of cutting interest rates, which reduces the opportunity cost for holding gold."

Mr Chwee said that the effect of bank collapses on the price of gold was, in fact, limited when compared to the interest rate environment at the time.

"The Fed was still signalling it was on a path to keep interest rates high, thus making gold less attractive due to the high opportunity cost," he said.

Mr Gregersen said that new highs occur naturally over time as the US dollar depreciates due to inflation.

"Since 1970, the average gold price increase has been 7.8 per cent per year, for example," he said.  

Will prices remain elevated?

Since the high of Dec 4, the price of gold has gradually declined. As of Monday (Dec 11), it was trading at just under US$2,000 per ounce.

So where could prices go from here?

Mr Chwee said that even though markets expect the Fed to begin cutting interest rates in March 2024, OCBC does not expect this to happen until June 2024.

"This will support gold prices, though there could be some weakness if the Fed doesn't cut rates in March 2024 as markets currently expect," he said.

"We expect gold prices to remain elevated for the next six months," he added.

Mr Heng Koon How, head of market strategy at UOB, said he forecasts gold prices to rise further to US$2,200 per ounce by the fourth quarter of 2024. 

"This is based on our core view that the US Fed will start cutting rates gradually across (the second half of 2024) and the US dollar will be softer as well," he said. 

Going into 2024, the US presidential election and ongoing geopolitical tensions are likely to see more people turn towards precious metals, Mr Gregersen said.

"About a quarter of central banks also indicated their intention to increase their gold reserves further in 2024," he added.

Mr Goh said: "Whether or not gold continues to rally will depend on the trajectory rates. If inflation continues to moderate and the Fed implements rate cuts next year, then gold will likely trend higher from here."

"However, if there is a resurgence in inflation and the Fed is forced to hike rates further, we expect gold to retrace some of its recent gains," the DBS analyst added.

Mr Manly said that prices beyond US$2,500 an ounce are a possibility.

"Fundamentals such as heightened geopolitical risk and the expectation that the Federal Reserve will soon begin to cut US interest rates should in theory act as triggers to send the gold price higher," he said.

"If the US$2,100 range is successfully breached on the upside and if new all-time highs are achieved, this could send the gold price up to the US$2,500 range or higher.

"It all depends on how strong the underlying market is compared to the incentives of the bullion banks and western central banks to try to keep the gold price down."

Should retail investors consider investing in gold?

Describing gold as a "good portfolio diversifier of risk", Mr Heng said: "It is good from a long-term diversification point of view to allocate some gold into the portfolio."

Silver Bullion's Mr Gregersen said that it is a good time to buy metals, sharing that Silver Bullion saw a 300 per cent increase in sales volume last week.

"Physical gold mitigates counterparty jurisdictional and currency risks while reliably appreciating over the long term," he said.

"It is a great choice in uncertain times."

Mr Goh and Mr Chwee, meanwhile, highlighted several things which retail investors should take into consideration when investing in precious metals.

Mr Goh said that "counterparty risk and liquidity risk are important points to consider when investing (in precious metals) through mutual funds or exchange-traded funds".

Mr Chwee also brought up liquidity as something to consider, as precious metals are subject to market fluctuations and may not be immediately convertible to cash. He added that, unlike cash, gold bears no interest. 

He also said that buyers must consider storage when buying physical gold, as it could incur additional costs, although he noted that investors can purchase precious metals digitally through banks including OCBC.

"Consumers should also consider ... their risk profile and appetite, and speak with a financial adviser before making a decision to invest in gold," he said.