Gold Rates

The Recap: Highlights of Gold Price Movements

Gold prices often rise during periods of economic uncertainty and turbulence. This is why analyzing gold price history can provide useful insights on where the yellow metal may be headed in the future.

For example, investment demand surged following the COVID-19 pandemic and a potential retreat in interest rates across 2024 could drive prices higher.

1. The Fed’s dovish stance

The Fed is a powerful force that influences the gold price and its impact on investors. During periods of economic slowdown or recession, the Fed will lower interest rates to stimulate borrowing, investment, and consumer spending. This can push gold prices higher, as it is seen as a safe-haven asset that helps protect against inflation and negative economic effects.

But the Fed’s policy direction can vary, as each of the 12 members of the Federal Open Market Committee (FOMC) has their own unique outlook and viewpoints on the economy. Some are hawkish, while others are more dovish. This makes it hard to predict the Fed’s next move, which can cause uncertainty in the markets.

Generally speaking, hawkish policies prioritize fighting inflation over promoting economic growth and creating jobs. They may do this by raising interest rates or limiting credit availability, which can cause slower economic activity in the short term. A dovish policy, on the other hand, prioritizes supporting economic growth and employment. This can be done by lowering interest rates, expanding the money supply through measures such as buying government securities or reducing reserve requirements for banks, and encouraging more borrowing.

When the Fed is hawkish, investors can expect to see rising interest rates, which make non-yielding assets like gold less attractive. Conversely, when the Fed is dovish, investors can expect to see falling interest rates, which will make non-yielding assets like bullion more appealing. This is why investors are paying close attention to the Fed’s policy shift, as any movement could affect the gold price. In addition, many central banks own large amounts of gold as a way to diversify their reserves away from paper currencies.

2. China’s monetary policy

The People’s Bank of China is responsible for monetary policy and regulation of financial institutions in mainland China. It is the second largest central bank in the world by assets, and is the second largest public institution in terms of overall global financial assets. It is also the governing body that oversees the Chinese currency, the yuan.

The PBOC’s mandate is to keep the yuan stable, contribute to economic growth, and promote structural reform. The PBOC is trying to achieve this by adopting “prudent monetary policy that will be flexible, appropriate and targeted.” The goal is to ensure the stability of China’s money supply and guide financial institutions to scale up support for small and micro businesses, green development and technological innovation.

In addition to stabilizing the yuan, the PBOC has been working to deleverage local governments and businesses. This has included tightening budget deficits, reducing lending and increasing tax collection. The PBOC has also been trying to bring shadow banking activity into the regulated banking system.

These measures have been successful in slowing credit growth and decreasing overall debt levels. However, inflation figures remain low, which has concerned some that the PBOC may loosen monetary policy in order to stimulate lending and growth.

In a recent speech, the PBOC Governor Yi Gang indicated that the PBOC was moving toward market interest rate-based monetary policy and away from quantity-based tools (such as RRR). However, he also said that the PBOC would continue to operate a hybrid system for some time. These policies will affect the economies of nations around the world, including Australia, Latin America and the Middle East, which are closely linked to China’s economy through commodity markets.

3. Russia’s economic outlook

As the United States and our coalition partners continue to isolate Russia by placing increasing economic sanctions on its oligarchs, banks, companies, and key sectors of the economy, the Kremlin is reorienting the country’s economic development towards one sector: energy commodities. As a result, Russia’s GDP growth is expected to decline through 2023 and early 2024. While Moscow’s fiscal and monetary policy gymnastics can temporarily mitigate these effects, long-term growth prospects for Russia are fundamentally undermined.

In the short term, Russia’s economy has been weakened by the mobilization of labour resources for war and a massive brain drain of those with means – particularly those with high-skilled jobs in information technology and other knowledge-intensive sectors. The loss of this labour depletes the skills, knowledge, and innovation capacity that Russia depends on for its future prosperity. This drain compounds underlying demographic trends that have made it clear Russia would face a depleted workforce in the long run.

The Kremlin is also reorienting toward a command economy, with a growing share of GDP being produced by the state or its oligarchs. However, greater reliance on state-directed economic production is likely to induce inefficiencies and reduce the amount of output for each unit of inputs (the so-called ‘productivity’). This can be seen already in Ukraine, where increased public spending on military production has not translated into higher productivity despite record levels of government investment. The same will probably be true for Russia once it shifts to a larger role in producing weapons and other war materials. In the long run, these factors will make it increasingly difficult for Russia to develop economically without a stable, secure partner with which to trade.

4. China’s infrastructure spending

In recent years it has been easy to overlook gold’s impact on global growth trends because monetary policy and nagging tail risks have dominated the conversation. But in times of political uncertainty, the precious metal can gain appeal as a safe haven. Uncertainty over Brexit for the UK and Europe, who’ll be president in the United States, or whether terrorist threats in the Middle East can be dealt with can fuel jitters and boost demand, pushing gold prices higher.

Historically, infrastructure spending has played a critical role in China’s economic rise, from laying miles of railway tracks to building record-breaking skyscrapers. The country’s leaders rely on infrastructure investment to foster growth and secure employment in their jurisdictions. But the effectiveness of this approach has become increasingly questionable. Many local governments have run up massive debt overhangs, often leaving them unable to provide basic services to their citizens.

China’s leadership is now looking for a way to stimulate the economy without running up local government debt. At its recent Central Economic Work Conference, Beijing vowed to “appropriately front-load infrastructure investments in 2022” to shore up growth and create new jobs.

The government has earmarked funds to finance these projects and is working to “optimize the debt structure of both central and local governments.” While it’s too early to tell whether this latest effort will have the desired effect, it is encouraging to see the leadership taking steps to address these concerns.

The pace at which these projects are carried out will have a significant impact on the overall economic picture and, in turn, on gold’s price movement. As demand for the precious metal peaks, it’s likely to be more difficult to obtain at a reasonable cost, which could push prices higher.

5. The U.S.-China trade war

The world’s two largest economies are locked in a trade war that’s taking a toll on consumers, workers, businesses and global growth. In the US, President Donald Trump blames China for unfair trading practices like intellectual property theft and forced technology transfer. In turn, China believes that the US is trying to restrict its rise as a global economic power.

The conflict triggered by these tensions is affecting the entire global economy and will likely continue to do so until both countries can reach a mutually agreeable trade deal. As a result, investors are seeking safe-haven assets such as gold to mitigate the risk of further economic decline.

As the trade war continues, the number of new gold positions on eToro has risen by 108% since May 13 and bitcoin positions have surged by 123%. This is due to the fear of a potential economic slowdown, which could lead to rising interest rates and a decrease in demand for the metal.

The latest phase of the trade war began with the US imposing tariffs on hundreds of billions of dollars worth of Chinese goods. Eventually, Beijing responded with additional tariffs on American products. Despite the fact that both sides have signed a preliminary deal, most of these tariffs will remain in place until both parties can come up with a more lasting solution. This will likely take several more months at minimum, which means that the gold price is in for a volatile ride in the short term. However, it’s important to remember that gold prices have historically performed well during periods of geopolitical instability. As such, the metal’s price may rise further in response to the escalating trade war.