Gold price hits highest level in four months

Gold prices hit their highest level in four months this week. The price of the precious metal has been in an uptrend since March and reached a level of more than €49,600 per kilo on Wednesday. The silver price is also on the rise again, as the price even exceeded €750 per kilo last Tuesday. Apart from a brief spike during the Silversqueeze that is the highest price since September last year. Both precious metals are benefiting from rapidly rising inflation and a flight to safe havens. Investors were startled this week by a significant drop in the price of cryptocurrencies.

In March, the gold price fell below €46,000 per kilo and Reached lowest level since the start of the corona crisis. As a result of this drop in the share price, there was more interest in the precious metal in important markets such as India and China. Inventories of Chinese gold ETFs rose to record highs, as did India's gold imports. Pent-up demand in the rest of the world put a solid floor under gold prices. Due to the price increase of the last few days, the precious metal managed to break the downward trend from the record level of August last year. That is a very positive signal.

Gold price to highest level since February

Gold benefits from higher inflation

Gold traditionally performs well in the face of low interest rates and rising inflation, as investors buy the precious metal as a hedge against currency depreciation. In recent months, that seems to be working in favor of gold again. While interest rates are stabilising, inflation continues to rise. In April, the Official inflation rate even to 4.2% year-on-year, the highest level since September 2008. The higher inflation is caused by record prices for various commodities, which have also increased the prices of many consumer goods. The graph below shows how fast inflation has risen.

Inflation rate rose in April to highest level since September 2008

Negative interest rates

Rising inflation is making investors nervous, as it has not yet tempted central banks to revise their monetary policy. According to the Fed and the ECB, the rising prices are the result of temporary factors and there is therefore no reason to intervene now. Investors fear that inflation will rise even further as a result, causing the purchasing power of money to evaporate even faster. The real interest rate on US 10-year Treasury bonds has been negative for some time. That's the price investors are currently paying for the safety of U.S. Treasuries.

The rise in bond yields put pressure on precious metals prices earlier this year, but now that inflation is rising, investors are looking at precious metals with renewed interest. Gold and silver also benefited from the fall in the price of cryptocurrencies. Most virtual currencies lost more than a quarter of their value this week, causing many price gains to evaporate. In recent months, cryptocurrencies have become very popular among a larger target group of savers and investors. In April, a Bitcoin was worth even more than a kilo of gold, but now the virtual currency is at its lowest level against gold since February.

Gold price moves in line with real interest rates in the US

Gold price forecast

Investors will be focusing on central banks and inflation data in the coming months. If inflation remains high and central banks allow it, this could provide a stimulus to the Gold price. The Federal Reserve is already hinting at a possible tapering of its asset purchase program, but does not seem to be in a hurry yet.

Analysts at Morgan Stanley expect the Fed to provide more clues in that direction starting in September. That could hinder a further rise in gold prices, although analysts at the bank expect gold to remain above $1,700 per troy ounce in the second half of the year.

Analysts at Deutsche Bank believe gold will benefit from high inflation, but do not yet expect a rise to last year's record level. If central banks taper their stimulus, real interest rates will rise and the gold price will come under pressure. Deutsche Bank analysts also expect gold demand in China and India to weaken if the price stays above $1,800 per troy ounce for longer.

This contribution was made from Geotrendlines