Experts predict soaring prices of gold amid global uncertainties

XTB's Deputy Director of Analysis Department remarks that contrasts in the gold market are now more evident than ever, highlighting that despite reaching record highs, the market witnessed its most significant daily decline in years. Gold remains only 5 percent below record levels amidst high yields in the USA and a reduction in ETF-held gold. Given these extremes, gold prices above £1,850 per ounce seem steep.

An oversupply in the gold market has been the norm for years, which doesn't affect gold as adversely as other commodities. The jewellery sector, traditionally making up more than half of the global gold demand, has seen relatively stable demand.

Notable shifts have been seen in the investment demand for physical gold and purchases by central banks, now nearing 50 percent. When you also consider ETF funds investing in physical gold, at one point their share almost hit 60 percent. - highlights the report, reminiscing about the peak of 2020 driven by pandemic responses.

Despite the redirection of funds from ETFs to stocks or cryptocurrencies, gold prices stayed lofty, even with significant interest rate increases in the USA and many of the world's leading economies. According to XTB, this illustrates gold's value retention during uncertain times, particularly in the battle against inflation. Speculations about interest rate reductions towards the end of last year led to gold prices consistently staying over £1,600 per ounce.

The XTB analyst recollects how the conflict between Russia and Ukraine sent gold prices soaring past £1,600 per ounce, but from March 2022, dollar rates and yields became the crucial factors. The narrative shifted in October with escalations in the Middle East. Generally, geopolitics plays a limited role in gold's long-term performance. Still, the dynamics change significantly when coupled with a surge in gold demand from hedge funds.

XTB also underscores China's growing importance, long one of the top gold consumers. The People's Bank of China has been consistently buying gold for 17 months, with China ranking as the 6th largest gold holder globally. A record number of long positions in gold contracts in China is observed, likely influenced by the country's ban on cryptocurrency trading and the search for secure assets amidst geopolitical and economic uncertainties.

According to the XTB expert, potential risks to gold prices include a de-escalation of geopolitical tensions, which could diminish the demand for safe assets, and a resurgence of high inflation that might compel central banks to increase rates again. Yet, after attaining record highs, gold might seem overvalued. Still, gold might reach new historic peaks when compared to other assets like copper, oil, the S&P 500, or against the backdrop of substantial central bank balances.

The analyst believes that the level of £2,000 per ounce is not too distant, with many institutions forecasting around £2,410 in 2024. Nevertheless, the advice is that any gold investment should be part of a diversified portfolio and considered with a long-term perspective, highlighting that negative returns on such investments over a 5—to 10-year period have been uncommon in the last three decades.