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Factors Driving the Increase in Gold Prices

2024-05-30 06:57:54.825000

Gold prices have continued to exhibit volatility in Friday's trade, swinging between gains and losses. This volatility can be attributed to the escalating geopolitical rift between Iran and Iraq, which has increased the safe-haven appeal of gold. On the MCX, gold June futures contract traded with a slight decrease of 0.01% at Rs 72,674 per 10 gm. Traders are eagerly awaiting fresh cues on economic data and insights on the geopolitical front, as these factors could potentially propel gold higher. Despite fading hopes of an interest rate cut, analysts remain divided on gold's outlook. However, due to global uncertainty, geopolitical tensions, and aggressive buying by global central banks, the overall outlook for gold prices remains positive. In fact, some analysts predict that gold prices could reach levels of Rs 1,00,000 per 10 gm in the next two to three years. In the near term, gold is expected to move higher, especially with the auspicious Hindu festival of Akshaya Tritiya falling on May 10. The bullish sentiments towards gold are likely to persist due to its role as a safe haven amidst global geopolitical turmoil. Near-term developments such as a potential Gaza ceasefire could temporarily impact gold prices negatively in the short term, leading to a price correction. However, OCBC foreign exchange strategist Christopher Wong believes that the bullish outlook on gold will stay strong. Wong attributes the recent price decline to fading concerns of geopolitical risks and hawkish repricing in US interest rates. Despite this, SPI Asset Management managing director Stephen Innes expects gold to trade at US$2,500 per ounce by year-end, given the proliferation of geopolitical risks and expectations of a contentious US election. Central banks have significantly increased their gold purchases this year, with central bank gold purchases exceeding 290 tonnes in the first quarter of the year, which is a record high. This trend may continue in the era of rising geopolitical tensions and it will be one of the factors supporting gold prices. The gold price (XAU/USD) extends its upside near $2,360 on Monday during the early Asian trading hours. The rising geopolitical tensions in the Middle East boost safe-haven flows and benefit precious metals. Several US Federal Reserve (Fed) officials delivered hawkish messages last week. Atlanta Fed President Raphael Bostic said that she didn't expect it would be appropriate for the Fed to cut interest rates in 2024, citing elevated inflation in the first several months of the year. Minneapolis Fed Neel Kashkari noted that he is in 'wait and see mode' about future monetary policy. The ongoing geopolitical tension in the Middle East might lift the price of precious metals, a traditional safe-haven asset. The spot price of gold has continued to rise over the last seven months due to conflict in the Middle East. On May 19, Iran's president, Ebrahim Raisi, died in a helicopter crash. The Middle East conflicts involving Israel against Hamas, Hezbollah, and Iran have been significant factors in the rising price of gold. Gold had a spot price of $1,832 per ounce the day before the initial attack and is now up to $2,431 seven months later. The sustained higher prices in gold this year have also been backed by increasing demand as a hedge against stagflation. Potential market-moving events for the week of May 20 include the Existing Home Sales report, the Initial Jobless Claims report, and the Consumer Sentiment report. A combination of negative signals for the U.S. economy may create more demand for safe-haven investments in precious metals like gold and silver.

Gold prices reached a peak of over US$2,449.89 per ounce on 20 May 2024. Factors driving the increase include gold being seen as a safe haven in times of uncertainty, increased demand from central banks in East and Central Asia, and other factors such as high inflation, monetary policy, and supply and demand. Gold serves as a hedge against inflation and is perceived as a reliable store of value. The Federal Reserve's aggressive rate hikes have not eased inflation, and the potential reduction in rates could see gold prices climbing once more. Central banks, particularly in East and Central Asia, have been increasing their gold reserves, with China's central bank being a noteworthy example. Demand for gold in China, both in terms of jewelry and investments, has been increasing. The role of gold as a stable investment is reinforced amid geopolitical tensions and global uncertainties. These factors are expected to continue bolstering gold prices in the foreseeable future.

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