During recent months, positive changes were observed in the gold market due to an increase in investment demand. Moreover, global gold reserves increased by 17.5 tons, which is an estimated value of $1.4 billion. This growth indicates the renewed interest of investors in gold as a reliable asset in conditions of economic uncertainty.
At the same time, positive dynamics is observed not only in the segment of physical gold, but also in financial instruments related to it. According to the World Gold Council (WGC), global exchange-traded investment funds (ETFs) backed by gold have recorded inflows of funds for the second month in a row. This indicates investors' confidence in the stability and prospects of gold as a means of preserving capital and protecting against inflationary risks. Gold futures are also on hype, as it can be seen from the graph below.
The reasons behind gold rally
Since the beginning of COVID-19, the central banks of different countries have been buying gold gradually to prevent the price from fluctuating. Due to that, the gold price has still increased, and the gold rush has begun. Today, everyone is looking for gold reserve extraction possibilities or trying to purchase metal.
Furthermore, geopolitical uncertainty will keep gold prices high in the near months. As geopolitical risks rise, investors are likely to purchase more gold as a hedging asset, pushing its price upward.
Another catalyst for the gold price can be The Federal Reserve's rhetoric. In particular, this implies a possible rate cut. The potential rate reduction only fuels the demand for gold. When the rates are cut, gold prices will grow even more.
“Golden” forecast: what’s next?
To delve deeper, let us consider some figures. The approximate production volumes per year for gold are 3,000 tons. Extracted gold reserves in the world range from 50 to 100 thousand tons.
Talking about consumption (approximate figures for the overall picture): about 15% for technical goals, 45% jewelry, and 40% for investments (from 10% to 30% of the Central Banks, depending on the Fed and ECB rates).
Considering cheap recycling from secondary materials, gold prime cost can vary from 1000 to 1300 dollars per troy ounce. However, gold differs from, for example, oil in that it does not have a particularly large necessary use in technological chains. Gold had to be bought more when COVID-19 and the distribution of money began, and that's precisely when the central banks began to buy it.
Considering global trends, due to inflation, the cost of production of all goods increased. Central banks' demand for gold will continue to support the metal price, but this will also lead to increased gold production and eventually to oversupply. We may see a long-term movement of the gold price in the range of $2,500, or it may decrease if demand from industries, central banks, and the general public begins to decline, as production growth has already started.