Who would have thought that a couple of weeks ago gold would be trading at the record high of $2,000 an ounce? Well, it’s here! The precious metal has reached a new milestone as the dollar continues to spiral downwards.
Gold has risen by over 7 percent in the last three trading days, hitting a seven-year high. This represents an incredible return for investors that have been holding gold for years, and for those who jumped on the bandwagon at the right time, it could be even more rewarding.
So what is driving this surge in gold prices? And what does it mean for investors? In this article, we’ll take a closer look at why gold is soaring and what kind of returns you can expect from investing in this precious metal.
Fed’s Effect on Gold Price
The Federal Reserve’s play on its currency has caused a profound shift in the global gold market. This week, when Fed chairman Jay Powell said he intends to keep inflation and interest rates low for a long time, gold had one of its biggest rallies on record — returning to the $2,000 barrier.
Why? Well, when money is cheap, investors see it as an opportunity to invest in alternative assets, like gold. Not only that, but with a lower-value dollar, gold becomes more appealing because it is priced in dollars so its perceived value increases relative to other currencies.
What’s more, when the dollar is down, uncertainty around global financial systems drives investors towards gold as a safe haven asset since it can maintain value in volatile markets. That’s why this week’s news has helped fuel the gold rally even further—with many speculating that prices are likely to continue their rise in the coming months.
Impact of Weak Dollar on Gold
One of the key features propelling the surge in gold is the increasingly weak U.S. dollar. As investors rush to ditch the dollar, gold has become a safe asset to invest in, thus driving up its price.
The dollar’s slow decline stems from Fed Chairman Powell’s statements that interest rates would remain low for an extended period of time which has caused investors to expect inflation and a weaker currency as a result. As inflation erodes purchasing power, investors flock to gold as they try to preserve their purchasing power and realize an appreciation in value of their investments.
Moreover, since gold prices are traded in U.S. dollars, if it falls in value, that impacts gold prices along with other commodities like oil and copper that are also traded in dollars. This further drives investor confidence in gold as they seek out an asset that can help maintain its value over time and withstand currency fluctuations.
The Return of $2,000 Gold
The gold market hit a big milestone last week—for the first time since the financial crisis, it made its way back over the ever-important $2,000 mark. As of midweek, an ounce of gold traded at $2,072!
So why is gold hitting these highs? Well, it could come down to several factors.
U.S. Dollar Slump
The U.S. Dollar Index (DXY) has been slumping thanks to some post-Fed intervention. In other words, the central key asset of the global markets has lost much of its luster due to what many investors are dubbing “the July Effect.” This means that gold—being an alternative asset—rose in comparison to the failing dollar.
Investor Optimism
As part of this trend, investor optimism about trading gold has grown both in domestic and international markets since May 2020. For example, some analysts suggest that investors are increasingly looking for ways to diversify their portfolio and protect their wealth from inflation and a potential economic recession as well as political uncertainty.
Safe Haven Asset
Gold is often considered a safe haven asset primarily because it can offer protection from unanticipated price movements since it has low correlation to other assets like stocks and bonds. This means that when most risk assets experience volatility or distress, investors may opt for gold as an alternative investment option in order to diversify their portfolios and hedge against losses in other assets.
US Dollar Slide in Response to Fed Move
It’s no secret that the US Dollar has taken a nose-dive this summer, and now we’re finally seeing the results: Gold is soaring back up to $2,000.
This latest financial trend is largely being attributed to the Federal Reserve’s surprising move to lower interest rates back in July. When the Fed makes a move like this, investors tend to steer away from conventional options like the dollar and start diversifying their portfolios, buying gold as a hedge against inflation.
This time around, gold prices have been particularly volatile due to geopolitical uncertainty as well. The ongoing trade war between the US and China continues to create economic uneasiness, driving investors towards “safe” assets like gold and away from more risky investments.
On top of that, it looks like gold will remain in high demand since central banks across the globe have started buying it up again after a five-year drought. This, combined with falling demand for US dollar instruments and rising demand from large institutional investors has proven too difficult for the currency to ignore.
Analyzing the Effect of Interest Rate Cuts
The Fed’s emergency interest rate cut and subsequent announcement of additional economic stimulus measures has left many Americans wondering what this means for the greenback—and their investments.
It’s no secret that when the Fed cuts interest rates, the value of the dollar tends to decrease on global markets. This time, however, it seems that this downward trend is being exacerbated by the additional measures announced. As the dollar falls, so have other global currencies—and in turn, gold has soared.
The Fed’s measured response has been echoed by other central banks around the world, as countries look to shore up their economies against further shocks from coronavirus-related market volatility—which could also be seen as contributing to gold’s resurgence.
In addition to a weakening dollar, there is growing demand for safe-haven investments like gold amid unprecedented economic turmoil. With prices for physical gold hitting their highest levels in seven years — and returning to $2,000 per ounce — it appears investors are seeing it as a more profitable place to put their money than other investments such as equities or bonds.
Future Prospects of Gold Price Increases
As you might already know, gold prices recently reached their highest level in history, soaring above $2,000 per ounce for the first time. Not only have gold prices been pushed higher by the weakening US dollar, but the prospect of further price increases in the future is looking brighter than ever.
An Aging US Dollar
The US dollar’s days of being a bulwark against market turmoil may be over, thanks to record-low interest rates and a widening budget deficit. With its position as a safe haven currency increasingly under threat, gold is becoming an increasingly attractive asset as its value relative to the dollar continues to rise.
Fed Stimulation Fuelling Gold Price Increases
The Federal Reserve has pumped trillions of dollars into the economy to stimulate growth, but all that money printing has weakened the purchasing power of the US dollar. As more dollars are printed and inflation rises, investors are increasingly turning to gold as a hedge against inflation and financial instability.
Increased Demand from Institutional Investors
Institutional investors have also played an important role in driving up gold prices – many have increased their allocations to gold-backed exchange-traded funds (ETFs) due to their liquidity and low hedging costs when compared with physical gold investments.
Gold’s meteoric rise may not continue forever, but it looks set to remain an attractive long-term investment for those looking for a safe haven asset in turbulent economic times.
In conclusion, although the dollar was struggling to make a comeback, gold rose significantly from its price a year ago, a sign that investors are still seeing gold as a safe-haven asset.
We may not be seeing a return to the days when gold was the one secure financial asset, but it’s clear that this precious metal is becoming an increasingly viable option for those seeking a safe option in uncertain times.
So if you’re looking to diversify your portfolio, now might be a good time to consider buying gold. Not only is it a solid investment, but it could also be a great hedge against inflation – something everyone should be considering these days.