Hands holding gold bars.

SINGAPORE: The price of gold hit an all-time high on Monday, Dec 4, soaring past the previous record set in Aug 2020. The precious metal was traded at over S$2,820 (US$2,100) per ounce, driven by a combination of factors that have sparked interest and concern among investors, Channel News Asia reports.

Gold, a traditional store of value for centuries, has maintained its status as a haven in market volatility. To understand the recent surge, experts from various financial institutions provided insights into the multiple factors influencing gold prices.

Factors affecting the price of gold

Factors affecting the price of gold include the supply of the metal, market volatility, central bank decisions, and the value of the United States dollar. Geopolitical tensions and concerns about inflation also play a significant role, with physical gold being a preferred haven during crises.

Gregor Gregersen, CEO and founder of bullion dealer Silver Bullion emphasised that gold tends to perform well during recessions and crises when confidence wanes, leading people to seek the stability of physical gold. He stated, “We view physical gold and silver as long-term holdings which will do particularly well in times of crisis and stagflations.”

The recent peak in gold prices was notably triggered by comments from US Federal Reserve Chair Jerome Powell on Dec 1, suggesting a potential interest rate cut in early 2024. Powell’s remarks instilled confidence in investors, causing gold prices to surge to US$2,135.39 an ounce before retracing slightly.

DBS Chief Investment Office analyst Goh Jun Yong attributed the surge to falling treasury yields, moderating US dollar strength, and ongoing central bank buying. The Israel-Hamas conflict also contributed to the geopolitical risk dimension, influencing gold prices.

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Contrary to some views, OCBC’s Head of Wealth Advisory, Aaron Chwee, noted the impact of tensions in the Middle East, attributing the surge to strong demand from Asian central banks, particularly those in India and China, which account for over half of global gold demand.

The World Gold Council reported that central banks globally bought 800 tonnes of gold in the first nine months of 2023, marking a record high for that period. According to a statement from WGC earlier this year, “This strong buying streak from central banks is expected to stay on course for the remainder of the year.”

WGC also noted that Singapore emerged as the third-largest buyer of gold globally in the same timeframe, following China and Poland.

Mr Chwee added that concerns about a possible US recession also contributed to gold prices. On the other hand, Mr Gregersen noted that the missile attacks on commercial ships in the Red Sea contributed to the surge in gold prices.

The recent peak in gold prices surpasses previous highs during the early stages of the COVID-19 pandemic and Russia’s invasion of Ukraine. Experts highlighted that the current surge is unique due to a combination of factors, including a more conducive environment for gold amid rising interest rates.

Mr Goh pointed out that interest rates were either rising or too low during previous crises, limiting the potential for gold gains. However, with current policy rates at 5.5%, there is more room for future rate cuts, potentially driving gold prices higher.

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Mr Chwee also stated, “We are currently in a high-interest rate environment and looking at the possibility of cutting interest rates, which reduces the opportunity cost for holding gold.”

Since reaching its peak on Dec 4, the price of gold has gradually fallen and, as of Monday, Dec 11, trading just under US$2,000 per ounce.

What’s next for gold prices?

Mr Chwee mentioned that while markets expect the Fed to start cutting interest rates in Mar 2024, OCBC doesn’t anticipate this until Jun 2024. He said, “This will support gold prices, though there could be some weakness if the Fed doesn’t cut rates in March 2024 as markets currently expect. We expect gold prices to remain elevated for the next six months.”

Mr Heng Koon How, head of market strategy at UOB, predicts gold prices could rise further to US$2,200 per ounce by the fourth quarter of 2024. “This is based on our core view that the US Fed will start cutting rates gradually across (the second half of 2024) and the US dollar will be softer as well,” he explained.

Looking ahead to 2024, factors like the US presidential election and ongoing geopolitical tensions could drive more interest in precious metals, according to Mr Gregersen. “About a quarter of central banks also indicated their intention to increase their gold reserves further in 2024,” he added.

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Mr Goh noted that whether gold continues its rally depends on interest rate trends, stating, “If inflation continues to moderate and the Fed implements rate cuts next year, then gold will likely trend higher from here.” He added, “however, if there is a resurgence in inflation and the Fed is forced to hike rates further, we expect gold to retrace some of its recent gains.”

Should retail investors consider gold investments?

Mr Heng suggested, “It is good from a long-term diversification point of view to allocate some gold into the portfolio.”

Mr Gregersen from Silver Bullion noted that it’s a good time to buy metals, sharing that Silver Bullion saw a 300% increase in sales volume last week. He said, “Physical gold mitigates counterparty jurisdictional and currency risks while reliably appreciating over the long term. It is a great choice in uncertain times.”

Mr Goh and Mr Chwee highlighted some things for retail investors to consider when investing in precious metals. Mr Goh mentioned that “counterparty risk and liquidity risk are important points to consider when investing (in precious metals) through mutual funds or exchange-traded funds.”

Mr Chwee brought up liquidity as something to consider, as precious metals are subject to market fluctuations and may not be immediately convertible to cash. He added that gold holds no interest, unlike cash. Buyers must also consider storage when buying physical gold, as it could incur additional costs, although Mr Chwee noted that investors can purchase precious metals digitally through banks, including OCBC. /TISG