Gold has been on a tear recently, with multiple catalysts pushing prices close to historical highs. Over the past six months, the price of gold has risen approximately 20%, to more than $2,000 per ounce. That’s within striking distance of gold’s all-time high of $2,075.
People have been preoccupied by gold for thousands of years, and it has served as a robust store of value since antiquity. Today, gold can generate impressive returns—but only when market conditions are optimal.
Some experts believe gold’s current rally is only just getting started. Others are more skeptical of gold’s potential to deliver more price gains.
What Is Pushing Gold Prices Higher?
One of the biggest catalysts for gold in 2023 has been the outlook for interest rates.
The Federal Reserve has been aggressively raising interest rates for over a year in its ongoing battle to bring down inflation. Finally, the latest inflation numbers suggest the Fed is making progress in getting prices under control.
In addition, an unexpected banking crisis in March tightened the credit market, which may also have helped cool the economy and slow inflation.
Investors now anticipate the Fed will pause rate hikes and pivot to rate cuts sooner than previously anticipated. They see a nearly 70% chance of one more quarter-percentage point Fed rate hike in May and a 56% chance of a rate cut by July.
Gold is widely considered to be an alternative universal currency, but one that earns no interest payments or any other cash flows. As a result, it has historically had a negative correlation to interest rates. That’s been the case recently as gold prices rallied to new highs while the outlook for interest rates dropped.
The yellow metal is also seen as a safe haven if rising interest rates trigger a recession and weigh on corporate earnings.
Michael Landsberg, chief investment officer at Landsberg Bennett Private Wealth Management, says investors can turn to gold to play defense against a potential stock market sell-off.
“Our message to investors is to be patient,” Landsberg says. “Also, look to non-stock and bond assets, like gold and the U.S. dollar, to lower risk and potentially increase returns.”
Gold and the U.S. Dollar
Gold also has a negative correlation historically to the U.S. dollar. Because gold is typically priced in dollars, a weak dollar means investors pay more for the same amount of gold.
There are also psychological factors adding to the negative correlation between gold and the U.S. dollar. Many investors see an immutable, intrinsic value in gold tied to its utility and its unique physical properties, including its beauty and its softness.
When investors lose confidence in fiat currencies, they buy gold as a safe haven asset. The collapse of Silicon Valley Bank and a handful of other institutions in March rattled confidence in the U.S. financial system and the dollar, only adding to gold demand.
The negative correlation between gold and the U.S. dollar has held up so far in 2023. The U.S. Dollar Index (DXY) is down 1.3% year-to-date, while the price of gold is up more than 10%. If the Fed begins to loosen its monetary policies in the second half of the year, the dollar could be pressured further.
In fact, Eurizon SLJ Capital recently predicted the dollar could fall another 10% to 15% by mid-2024, a potentially huge drop for the world’s reserve currency.