Why Gold Keeps Hitting Record Highs

Gold climbed to a record high of more than $2,380 Tuesday morning, extending a bull run that has outpaced the S&P 500 so far this year, particularly over the last several weeks. 

The precious metal has risen more than 15% since the end of February, and Bank of America on Tuesday said prices could climb another 26% to $3,000/oz by next year. The S&P 500 is up less than 2% since the end of February.

Geopolitics, Central Bank Demand, Rate-Cut Hopes

Gold, the BofA analysts said, has been boosted by a confluence of factors including geopolitical risk and strong demand from central banks, and could get an even bigger boost from interest rate cuts later this year. 

China has shown a particular appetite for gold recently. The People’s Bank of China added more than 200 tons of gold to its reserves in 2023, nearly twice as much as the second-biggest buyer, Poland.

Chinese retail investors have also turned to gold amid a downturn in Chinese equities and instability in its massive property market. 

"Gold had a strong March as futures investors, green shoots from US gold ETFs and Geopolitical risk helped drive prices to new all-time highs," World Gold Council said in a commentary Tuesday.

Fed's Impact On Gold Prices

And yet, BofA points out, “the ongoing hiking cycle has kept many investors on the sidelines.”

The Federal Reserve's benchmark interest rate is at a 23-year high, and Fed officials have said repeatedly that they need more confidence inflation is under control before they will start cutting rates.

Gold demand is generally hurt by higher interest rates because gold is a non-yielding asset that becomes relatively less attractive as yields on other low-risk assets, like Treasurys, rise.

That relationship can be seen in the breakdown of the correlation between gold ETF exposure and prices. Assets under management at physically backed gold ETFs have declined relatively steadily throughout the Fed's tightening cycle while gold prices have climbed. Though that may have begun to change in recent weeks as investors return to ETFs for the fear of missing out on the gold rally.

“In our view, this is heavily influenced by continued apprehension over the direction of monetary policy,” the BofA analysts wrote. “Yet, if the Fed ultimately starts cutting rates, investors should return to the market.”

However, interest rate cuts this year are far from a sure bet after two months of mixed inflation data. Market participants and the Fed will be watching tomorrow’s March Consumer Price Index (CPI) closely for evidence disinflation hasn’t stalled.