In a surprising turn of events, gold, traditionally viewed as a safe haven in turbulent times, has been on a remarkable upward trajectory, defying conventional market wisdom. Over the past year, the precious metal has surged to all-time highs, mirroring the bullish run of major stock markets worldwide.

Contrary to its historical role as a hedge against stock market declines, gold has exhibited a positive correlation with soaring stock prices, reaching a record high of $2,160 per ounce earlier this week alongside unprecedented highs in Wall Street indices. This phenomenon has left investors puzzled, prompting analysis of the underlying factors driving this unexpected trend.

One significant factor contributing to gold’s ascent is the anticipation of interest rate cuts, particularly in the United States. Einat Meir, a macro and markets analyst at Discount Bank, explains that expectations of an impending interest rate cut have bolstered gold’s value. The metal, which does not yield interest, suffered during periods of interest rate hikes, making it less attractive to investors. However, with expectations shifting towards rate cuts, gold has regained its allure as a hedge against economic uncertainty.

Furthermore, gold exhibits an inverse relationship with real yields on US government bonds, with a decrease in interest rate expectations leading to a corresponding decline in bond yields. This dynamic further supports gold’s upward trajectory, as investors seek refuge from diminishing returns in fixed-income securities.

However, the relationship between gold and interest rates is not without its nuances. Discrepancies between the Federal Reserve’s statements and market expectations regarding the magnitude of interest rate cuts have occasionally caused fluctuations in gold prices. Nevertheless, the prevailing sentiment leans towards continued monetary easing, providing a favorable backdrop for further appreciation in gold prices.

Geopolitical uncertainty also plays a significant role in driving demand for gold. Escalating tensions, such as the ongoing conflict in Ukraine and the specter of geopolitical instability stemming from potential political developments, have fueled investor anxiety, prompting a flight to safety.

Furthermore, geopolitical events have prompted strategic shifts in the asset allocation strategies of major economies. Following the Russia-Ukraine conflict, the US government’s seizure of Russia’s foreign exchange reserves prompted countries like China, Russia, and Saudi Arabia to diversify their assets, including increased purchases of gold.

In addition to geopolitical factors, consumer demand for gold remains robust, particularly in countries like India and Russia, where cultural affinity and wealth preservation motives drive significant purchases. Central banks, historically the largest holders of gold, continue to bolster their reserves, further supporting the metal’s price.

Looking ahead, forecasts suggest continued strength in gold prices, with JP Morgan predicting an ounce of gold to reach $2,300 by 2025. As uncertainty persists in global markets and expectations of monetary easing remain prevalent, gold is poised to retain its status as a sought-after asset for investors seeking stability amidst market volatility.

Main article image: Gold, Chalinee Thirasupa, Bloomberg