Not only stock indices across the world have jumped to new all-time highs in recent days, but also the price of gold. It rose to an all-time high of almost $2,450 per troy ounce. This represents a price rise of 19 % since the beginning of this year alone. The spring correction of the previous rise in gold prices is therefore definitely over.
What is driving gold forward is that investors, after months of uncertainty, are finally seeing that the world's major central banks will go lower with interest rates. In the case of the European Central Bank, the start of the interest rate cut cycle looks set for June, while in the case of the US Fed it should happen in September. With the falling interest rate attractiveness of the euro and the dollar, the interest in gold is naturally growing. It is true that the rise in gold prices in recent months has been derailed by the mere realisation by investors that the US Fed is not going to raise interest rates any further. After all, the more attractive the dollar has been in interest terms, the more gold, which simply does not bear any interest, has suffered.
An even more important driver of the rise in gold prices is that central banks are buying gold for their vaults. They bought more than 290 tonnes in the first quarter. And that's a new record. This reinforces the trend of central banks buying more than 1,000 tonnes a year in 2022 and 2023. And what are the reasons for central banks hoarding gold reserves? It's certainly not purely economic factors - i.e., betting on an early decline in the interest rate attractiveness of the euro or the dollar. After all, central banks are not primarily concerned with profit. Geopolitical factors are a definite reason, with the clashes in the Middle East or the war in Ukraine. Incidentally, the latter has shown that it is not difficult for Russia to freeze its dollar-denominated foreign exchange reserves.
This is why many central banks in the emerging world are increasingly turning to gold. Finally, the case for more gold purchases by central banks is based on a desire to reduce dependence on the US dollar. It is no coincidence that China is leading the gold rush, having increased its gold reserves by 27 tonnes in the first quarter of this year. And watch out - the Czech Republic was the world's fifth-largest gold buyer in the first quarter of this year. The Czech National Bank (CNB) bought five tonnes of it, while it finished sixth with two tonnes in the same period last year. The CNB held 35.58 tonnes of gold in reserves at the end of March.
CNB Governor Ales Michl dreams that the central bank's gold reserve should gradually increase to 100 tonnes of gold. Even if this target were reached, gold would still represent only about five percent of the CNB's total foreign exchange reserves. Back to the gold price. We mentioned two significant incentives for its further growth. On the other hand, it has to be said that the current rise in the gold price is simply by leaps and bounds. Well, after a sharp rise always comes a downward correction. But the million dollar question is how long do we wait for this downward correction? If we look back in history, we also saw a spike in gold prices in, say, 2008. But back then, the spike extended for another 3 years and the price of gold doubled then.
Only then did it fall back. What do we mean by that? Far better than market timing is to buy gold with a long investment horizon - 10 years or more. Then we don't have to worry about whether the correction will come in a year or 3 years. We can enjoy the fact that over the long term, gold prices rise on average around 9 % per year.
Markéta Šichtařová - nextfinance.cz
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