Why have gold prices soared to an all-time high?

Investors have long been enamoured by gold. At a time when investors are concerned about their money being parked in asset classes that are experiencing uncertain volatility and when chances of acceptable returns from investments are dismal due to global inflation problems, gold is once again taking centre stage. Gold is highly prized not just for use in investments and jewellery making, but also for usage in the production of some electrical and medical products.

With the U.S. Federal Reserve announcing its ninth consecutive interest rate hike, gold prices have witnessed a remarkable global rally throughout March 2023.The gold price reached above $2000 an ounce today. People all around the world have been wondering how high the gold prices will go and how long the prices will stay high.

According to data from the World Gold Council, massive central bank purchases, spirited personal investor purchases, and slower exchange traded fund (ETF) outflows helped push annual gold demand to an 11-year high in 2022.

Central banks bought a 55-year high of 1,136 tons of gold last year. Simply put, Central banks increasing their gold reserves all around the world is one of the major factors behind the rise of gold price, their volume was one-third of the overall volume. 

Analysts have predicted gold prices have more room to rise and can touch $2600 an ounce. As the global banks continue struggling and Federal reserve continue raising interest rates, price of gold has the potential to break all-time highs and stay there. The global financial instability is expected to keep the gold prices elevated in the coming years.

Investors are keenly watching every step of the Federal Reserve to predict the future of the economy. Eventually, the Fed will have to choose between higher inflation or a recession, and either outcome is bullish for gold.

There’s usually an inverse relationship between gold prices and the U.S. dollar. But recently we saw a simultaneous increase in both, which is quite unusual. This scenario does not happen often, and when it does it happens because of financial stress and elevated financial concerns among the investors.

Another reason for the soaring of gold prices is the sanctions the USA has put on other countries, as most of the global trade happen in US dollar, some economists are considering these sanctions as USA weaponizing the US Dollar, which again has led the central banks around the world to diversify their reserves and increase their gold holdings.

As the world struggles with inflation and the effects of a banking system collapse as a result of a higher interest rate regime globally, the fluctuations in gold prices may continue throughout the year. Hedging your investments in such a situation by diversifying through safe havens like gold may be a wise course of action.