Gold Has Never Been This Expensive
The comments below are an edited and abridged synopsis of an article by Anna Cooban, CNN
*Gold breaching the crucial $2,100 level indicates a potential challenge for the US dollar and all fiat currencies. Volatility will continue, but gold has been above $2,000 for some time now. It will be interesting to see what occurs as a result of the BRICs expansion in January.
Gold hit an all-time high on December 4, buoyed by growing expectations of interest rate cuts among investors, a weaker dollar, and geopolitical tensions.
It jumped around 3% to reach $2,135 per ounce, rising above the previous record of $2,072 notched in August 2020. The price has since fallen, but all indications point to a higher high.
Investors have grown increasingly confident that the US Federal Reserve has reined in inflation through aggressive interest rate hikes and may start to cut borrowing costs in March next year. Higher interest rates push up the yields on assets such as US Treasuries, drawing in investors.
But when interest rates are low, falling, or expected to fall, demand for Treasuries ebbs, and gold becomes relatively more attractive.
The yield on the benchmark 10-year US Treasury bill has fallen from a 16-year high of 5% to stand at 4.3% last week.
The expectations of the end of the tightening cycle have longer-term yields lower. This has created a more favourable environment for gold.
Rate predictions have also weighed on the US dollar, making gold more appealing. Higher interest rates tend to boost the value of a currency by attracting more capital from abroad into the country, and the reverse is true when rates fall.
Cooban also discusses geopolitical risk, which has seen gold rise 10% this year.
The US dollar fell 3% last month against a basket of six major currencies. Since gold is priced in US dollars, the fall in the greenback’s value makes it less expensive for investors outside the US to buy the metal, which should have boosted demand and, in turn, lifted gold prices.