"Gold prices hit lifetime high at price of Rs 75,305 per 10 gm this week."

High Inflation Since Covid-19

Due to Covid-19, all Global supply chains got disrupted. Just as markets started recovering from it, Russia-Ukraine war thrown it all off the track.

Aftermath?

Shortages galored! 

Food, meds, energy, tech—you name it! And, It was causing prices to shoot up like crazy!

CPI (Consumer Price Index) expansion reached its highest point at 9.1% in 2022, then gradually declined in the first half of 2023. However, from late 2023 to early 2024, CPI inflation readings have been erratic and unpredictable.

And as if that wasn't bad enough!

Now, We've got more trouble brewing with the Israel-Gaza conflict and the Red Sea blockage by the Houthis, which has turned into IRAN-ISRAEL war.

It's like adding fuel to the fire, shooting food and energy prices through the roof, which in turn raising the gold prices.

"As  per US Labor Department, consumer price index, or CPI, rose 3.5% year-over-year in March 2024. This is up from a 3.2% year-over-year gain in February 2024 and above the 3.4% growth economists were expecting."

But, How inflation influences gold prices?

• Gold is often considered a safeguard against inflation because its worth typically rises when fiat currencies lose purchasing power due to inflationary pressures.

•  With the general price level of goods and services increasing, investors seek assets capable of preserving their value over time. 

• Gold, characterized by its limited supply and intrinsic value, becomes more attractive during inflationary periods as a means of wealth preservation.

• Moreover, central banks might enact expansionary monetary policies like lowering interest rates or implementing quantitative easing to counter inflation, potentially weakening fiat currencies and prompting investors to seek refuge in gold as a safe-haven asset. 

• Consequently, inflation erodes the value of paper currencies, driving investors toward gold as a reliable store of wealth and consequently boosting its price.

Example - Consider the 1970s to 1980s, when the average federal funds rate skyrocketed from 8.98% to 13.82%, as per Federal Reserve Bank of St. Louis. 

During that time, the price of gold rose from $35 per share to a whopping $850 per share, according to NASDAQ data.

US-Fed Policy

For the past two years, Inflation has been the Federal Reserve's primary concern, leading the Federal Open Market Committee to implement significant adjustments to U.S. monetary policy in order to lower inflation towards its desired long-term goal of 2%.

Between March 2022 and July 2023, the Federal Reserve increased its target interest rate a total of 11 times, elevating it to its present range of 5.25% to 5.5%.

And Now, In March 2023, US Fed has announced no rate cuts on Interest recently, which has been stagnant since last year.

"The US Federal Reserve, in its March 2024 meeting, voted to leave the key interest rate unchanged at 5.25-5.50 %, keeping the policy rate unchanged for the fifth straight time on the trot."

Although, there is no direct relationship between the US interest rate cut and gold price, but it has huge influence on Gold Price.

How? 🤔

The correlation between interest rates and the value of gold is complex and can be affected by various elements. 

Generally, there exists an inverse correlation between interest rates and gold prices. This implies that when interest rates rise, gold prices usually decline, and conversely, when interest rates decrease, gold prices tend to increase.

This is because rising interest rates make stocks, government bonds and other investments more attractive to investors. Lower interest rates make these alternative assets less appealing; driving investors towards gold, and increasing demand and the price accordingly.

But this time it is happening opposite? Isn't it ? 🤯

Interest rates are high, Fed has not announced rate cuts, then also Gold is having a bull run!

How's that happening? 🤯

Although US Federal Reserve increased interest rates in order to combat inflation. (Increased interest rates should have made gold less attractive investment)

But, global uncertainty, sticking inflation and economic volatility have overridden this general rationale, pushing investors towards gold as a store of value and driving up the gold prices.

Yeah, But This might be more or less true.

But, For sure, With, Federal Reserve projected to begin cutting interest rates this year, the outlook for gold is growing rosier only.

Geopolitical Tensions in the Middle East

First is already, ongoing Russia-Ukraine War.

Now, The ongoing conflict between Iran and Israel has heightened tensions in the Middle East and markets fear the further escalation in the situation.

Central banks Reserving up gold

In the Aftermath of Inflationary spike and Geopolitical Tensions, Central banks had been on interest raising spree since 2021. 

And now they are focusing on Diversifying their reserves and Gold is their go to instrument for that.

“As per data by the World Gold Council, Central bank purchases of gold more than doubled to a record high of 1,081 tonnes in 2022, dipping only slightly to 1,037 tonnes in 2023."

And this trend is expected to continue in 2024.

Notably, India is also increasing its Gold Reserves. The Reserve Bank of India (RBI) also made a significant gold purchase of 8.7 tonnes in January, its highest acquisition in two years.

The Chinese Factor

The slowdown in China as indicated by recent data is a significant economic event, due to which Demand for gold in China has been increasing steadily. 

With the Chinese central bank steadily accumulating gold reserves, this trend is contributing to higher gold prices not only in the US but also in India.

The Chinese central bank has purchased gold for the 17th straight month in March 2024 for their reserves in a bid to reduce their dependence on Dollar.

"China's recorded gold reserves increased by 314 tonnes, marking a 16.1% growth from 1,948 tonnes in October 2022 to 2,262 tonnes by March 2024."

General Elections

Generally, Elections can drive fluctuations in the rupee's value, impacting gold prices. Unexpected outcomes or policy shifts can sway investor confidence, influencing currency markets and subsequently gold prices.

Uncertain impending presidential election in the US have led to unstable global markets, which is a key factor in the sudden bull rally in gold.

Will this Gold Bull run continue in 2024?

The confluence of escalating geopolitical tensions, financial policy decisions, inflationary pressures, and increasing demand has led to this spike in gold prices.

In the future, gold will continue to be a safe haven for investors for its potential to store value in the midst of global currency debasement and will also appreciate in times of low interest rates.

But, it is advisable not to jump on any conclusion immediately. We have to see, how the global economy unfolds in coming days!!