What’s causing gold prices to rise, and why is it called a safe haven asset?

What happened?

Gold prices internationally have been hitting all-time highs for the last three days, reaching near $2600 per ounce, up 25% this year.

In India too, gold futures (driven by the international price) have crossed ₹73000 (per 10 grams of gold).

And even though the price of gold in India dipped to ₹67,400 because of a customs duty cut in the latest budget, it bounced back within two months because of strong demand.

Why is gold’s price rising?

It is anticipated that the US Fed (Central Bank of USA) would cut interest rates in their next policy rate announcement.

Here’s how it goes: if interest rates are low, loans get cheaper, people borrow more and ultimately more money is circulating in the economy.

In simple words, the supply of USD would increase, causing its value to decrease (Demand and Supply 101).

Now if you’re wondering how the devaluation of USD could affect the gold. Well, here’s a thing, it is a reserve currency.

Almost every country in the world holds USD as their forex reserves.

Reserve currency is a foreign currency that countries hold in large amounts for international trade and financial stability. It helps countries pay for imports, manage debts, and stabilize their economies.

So if you’re holding a currency that is going to be devalued, what could you possibly do? Well, buy the commodity, which once was the backbone for all paper currencies – gold.

Central Banks on gold buying spree

As per the World Gold Council (WGC), in 2023, central banks added 1037 tonnes of gold – the second-highest annual purchase in history – following a record high of 1082 tonnes in 2022, primarily driven by China, Turkey, and India.

Historically, gold has aslo comfortably beaten inflation. Another thing that adds to the value of gold is that gold typically performs well when the equity market is in a downturn. So having gold in the portfolio reduces the volatility.

To conclude

Gold’s stability and reliable performance, especially in tough times, make it a valuable asset.

As JP Morgan famously said, “Gold is money; everything else is credit,” highlighting its lasting importance in an ever-changing financial world.