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Key Points:
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Central banks have significantly increased gold purchases since 2022, driving prices higher despite rising interest rates.
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The traditional inverse relationship between gold and interest rates has broken down, with gold prices remaining elevated even as interest rates soared.
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Experts predict gold could reach $2,700 by early 2025 and potentially hit $3,000 within a few years due to ongoing rate cuts, geopolitical tensions, and the growing influence of the BRICS+ bloc.
The price of gold has surged over 30% in 2024, partly due to the rise in geopolitical tensions, an increase in the world’s central bank’s reserves, and the anticipation of the US Fed rate cut. The IMF World Gold Council reported during the 18 months (from Q3 2022 to Q1 2024), central banks purchased more than 2.6x the amount they bought in the preceding 12 years, and the validity of the historically inverse relationship between gold and interest rates has come into question.
From Q3 2022 to Q1 2024, central banks purchased more than 2.6x the amount they bought in the preceding 12 years.
The Rate Cut and Gold Price
Historically, there has been an inverse relationship between gold and interest rates: as interest rates rise, gold prices tend to fall, and vice versa. Higher interest rates make yield-bearing investments, like CDs, more attractive, diminishing the appeal of non-yielding assets like gold. In low-rate environments, gold becomes a preferred investment when rate-yielding assets yield less.
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However, this traditional relationship has started to break down in recent years. Gold prices have remained elevated despite soaring interest rates. In fact, the price of gold has increased by more than 825% since January 2020. One reason for this shift is the massive purchases by central banks and increased demand from Asian markets, which have kept gold prices high.
The price of gold has increased by more than 825% since January 2000.
Central banks have been buying tons of gold over the past 2 years. Data from the World Gold Council shows that central bank gold purchases tripled since 2022 when Russia invaded Ukraine. In 21 months, central banks acquired 310 metric tons of gold! These purchases are cushioning gold from the usual downward pressure of rising rates.
The price of gold has already risen over 30% this year. After the Federal Reserve’s recent half-point rate cut (September 2024), experts believe gold is well-positioned to rise further, especially if recession fears or economic instability increase.
What Happens to Gold Prices When Interest Rates Drop?
When interest rates drop, gold prices typically rise, as lower rates reduce the opportunity cost of holding non-yielding assets like gold. On the global market, gold is priced in US dollars. When rates are cut the dollar tends to weaken. This makes gold cheaper in other currencies, therefore increasing demand.
The inverse relationship between gold and interest rates has started to break down in recent years.
It should also be noted that the Chinese yuan is at its strongest level against the dollar since May 2023. Starting in 2022, China went on a gold-buying frenzy. In fact, according to the World Gold Council, China purchased 1,037 metric tons of gold last year – that’s more gold than all other central banks combined. China unquestionably drove up the price of gold, and Chinese consumers continue to import substantial amounts.
So, what’s next?
As rate cuts are expected to continue, experts predict that gold could climb even higher.
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Factors Driving Gold’s Rise: Geopolitical Tensions and Economic Uncertainty
In addition to central bank purchases, several other vital factors are pushing gold prices higher. Concerns about the U.S. debt, a declining labor market, and plans for continued rate cuts have led investors to seek gold to hedge against potential economic instability. Geopolitical tensions, particularly the ongoing conflicts in Ukraine and the Middle East are also fueling demand for gold as a safe-haven asset.
Another significant influence is the growing strength of BRICS+ nations. BRICS+ is an intergovernmental organization offering an alternative to the World Bank and the IMF. This 9-member group, which includes countries like China, Russia, India, Iran, and the UAE, now holds 15% of the world’s gold reserves. Furthermore, this month, Turkey (a member of NATO) officially applied to join the bloc.
The BRICS+ countries hold more than 15% of the world's gold reserves.
Experts believe the BRICS bloc may continue to reduce its reliance on the U.S. dollar, which could weaken the dollar and drive gold prices even higher. With China leading the charge, gold’s role as a reserve asset is becoming increasingly significant as these nations seek alternatives to the U.S. dollar.
Gold’s Outlook: Will It Hit $3,000?
Gold’s current trajectory suggests that prices could continue to rise, with Goldman Sachs Research Analysts predicting it may reach $2,700 by early 2025 and potentially $3,000 within the next few years.
Gold has historically performed well during times of uncertainty, with an average annual return of 9.5% since 2000. With inflation cooling and recession fears looming, the Consumer Confidence Index slipped sharply to levels not seen since the pandemic. This leads experts to believe that gold's appeal as a safe-haven investment will remain strong. While price fluctuations are expected, many analysts agree that gold is approaching a baseline of $2,500 and is positioned for further long-term gains, driven by market demand and macroeconomic factors.
The Bottom Line
The recent half-point rate cut was intended to maintain what the Fed perceives as a developing and stable economic balance. But as the fundamental shift towards the perception of gold as a reserve asset continues, gold’s appeal in the current economic climate will remain strong, regardless of fluctuations in interest rates. If gold's average annual performance continues, prices may reach $3,000 as soon as three years from now.
Frequently Asked Questions
How does gold react in relation to interest rates?
Gold typically has an inverse relationship with interest rates: when interest rates drop, gold prices tend to rise, as lower rates make non-yielding assets like gold more attractive. However, this relationship has weakened in recent years, with gold prices remaining elevated even during periods of rising interest rates due to factors like central bank purchases and geopolitical tensions.
What factors are driving the current surge in gold prices?
The key drivers include central bank gold purchases, geopolitical tensions in Ukraine and the Middle East, economic uncertainty, and the growing influence of the BRICS+ bloc, which is reducing reliance on the U.S. dollar.
Could gold reach $3,000?
Expert analysts from Goldman Sachs predict that gold could reach $2,700 by early 2025 and potentially rise to $3,000 within the next few years due to rate cuts, global instability, and increasing demand for gold as a reserve asset.
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Will is an expatriate from Arizona, USA, who studied Political Science at Arizona State University. As a passionate personal finance enthusiast, he combines his expertise with a keen interest in current events to create engaging and insightful financial content. Outside of his professional pursuits, Will enjoys the nostalgia of old-school video games, adding a unique touch to his multifaceted profile.