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In the month of May 2024, the gold market experienced a significant increase in prices, extending a trend that highlights the enduring appeal and value of this precious metal. Several factors have contributed to this surge, driving demand for gold to unprecedented levels. Heightened tensions in the Middle East have sparked concerns about geopolitical instability, leading investors to seek shelter in the traditional safe haven of gold. Additionally, there is mounting anticipation of interest rate reductions in the United States, making non-yielding assets such as gold more appealing compared to interest-bearing investments.
Moreover, the economic environment has been characterized by ongoing inflation, which has diminished the buying power of paper currency and propelled investors towards gold as a dependable store of wealth. These factors collectively enhance the attractiveness of gold, positioning it as an increasingly coveted asset in 2024.
Why Is Gold Rising In 2024?
The rise in gold prices in 2024 can be attributed to a number of factors:
1. Interest Rate Cuts and Economic Indicators
It’s quite plausible to anticipate three interest rate cuts in the U.S. over the year. The expectation of these adjustments significantly impacts financial markets and shapes investment strategies.
The anticipation is that the Federal Reserve will announce the first interest rate cut in June of this year. Gold typically exhibits an inverse relationship with interest rates. Lower interest rates diminish the opportunity cost of holding gold, which doesn’t yield interest or dividends, thereby increasing demand and driving prices upward. Conversely, higher interest rates can decrease the attractiveness of gold as an investment, resulting in lower prices. With expectations of interest rates decreasing in both the U.S. and India, gold prices may continue on an upward trajectory.
2. Surge in gold prices
Gold prices have surged by over 10-15% since the beginning of the year, solidifying its position as a favoured hedge against inflation and a safe haven amidst political and economic instability. This notable increase is primarily driven by substantial purchases from central banks and an escalating demand for safe-haven assets.
Further, gold demand in China has been increasing over recent quarters. The Chinese central bank’s significant additions to its gold reserves have contributed to the rise in gold prices not only in the US but also in India. Additionally, reports indicate a new trend emerging in China, where gold buying is gaining popularity among young Chinese investors.
3. Gold Prices Today
As of May 13th, 2024, the precious metals market has experienced significant activity. Gold prices have surged to unprecedented levels, propelled by worldwide trends and market forces, underscoring the enduring appeal of gold as an investment. In Delhi, on May 13th, 2024, the price of 10 grams of 24K gold is approximately 74,520 INR.
4. Gold’s Positive Trajectory in MCX
Gold prices on the Multi Commodity Exchange (MCX) have persistently risen, with geopolitical tensions and ongoing trade issues between the US and China serving as key drivers. The anticipation of interest rate cuts starting from June 2024 adds further momentum to this bullish outlook.
5. Relationship with Dollar
Gold is denominated in US dollars in global markets.
The rise in gold prices has coincided with a decrease in the value of the US dollar. When analysing gold prices in relation to the US Dollar, one can observe the influence of currency fluctuations on its perceived worth. When the dollar depreciates, gold may seem comparatively less expensive when priced in other currencies like the yen or euros (because more gold can be purchased when the dollar is weaker). This consequently drives up its demand and pushes the prices higher. Conversely, when the US dollar strengthens against other currencies, the price of gold tends to decrease in dollar terms.
How is Gold Expected to Perform?
The increase in gold prices depends on two critical factors: internal and external factors. Internally, elements such as domestic demand, currency exchange rates, and government policies exert considerable influence on the direction of gold’s movement. For instance, heightened demand for gold during cultural celebrations can drive prices upward.
Externally, factors such as global events, geopolitical tensions, and economic conditions in major economies exert influence on the price of gold. Events such as conflicts, shifts in global monetary policy, and economic downturns can spur a surge in demand for safe-haven assets like gold, driving its price higher. Let’s check these internal and external factors separately.
Internal factors that are expected to contribute to the price rise:
Cultural traditions: Gold holds profound cultural importance, particularly during weddings and Diwali festivities in India. It serves as a cornerstone of customs and traditions. As these significant occasions draw near, the demand for gold typically experiences a notable surge.
Gifting and adornments: Weddings and Diwali are occasions marked by the exchange of gifts and personal adornment. Gold jewellery and coins are favoured selections for both gift-giving and self-purchase during these times. Many individuals opt to purchase gold jewellery as both a timeless investment and as a means to partake in the cherished customs linked to weddings and Diwali.
Speculation and investment: The anticipation of increased gold demand during the wedding season and Diwali often sparks speculative buying by traders and investors, consequently driving prices even higher.
External factors that are expected to contribute to the price rise:
Geopolitical uncertainty: Gold is often seen as a safe-haven asset during periods of geopolitical unrest or uncertainty. Recent events, such as the Israel-Hamas conflict and other global geopolitical tensions, have heightened this uncertainty, leading investors to turn to gold for security. As long as these conflicts persist or escalate, the demand for gold is expected to remain robust, potentially driving up its price.
Inflation hedge: Gold has traditionally served as a hedge against inflation. In times of apprehension regarding rising inflation, investors often seek refuge in gold to safeguard their wealth. As global economies recover from the aftermath of the COVID-19 pandemic, there are concerns that inflation may rise. Thus, there could be an increased demand for gold as a means of hedging against inflation.
Investment and speculation: The expectation of increased gold demand during periods of uncertainty often prompts speculative buying by traders and investors. Their actions, driven by the desire to capitalize on potential price hikes, can consequently drive up the price of gold.
Conclusion
Gold prices have been experiencing an upward trend and are anticipated to continue rising. Nevertheless, it’s crucial to acknowledge that gold prices are influenced by a multitude of factors, creating a complex interplay. Consequently, prices can exhibit volatility in response to fluctuations in these factors. Predicting short-term movements in gold prices can thus pose challenges due to this complexity and volatility.
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