Is the long-term gold price uptrend still intact?
Global gold demand has reached record levels, driven by central bank purchases and investor appetite. We examine the key factors pushing prices to all-time highs and whether the current sell-off presents a buying opportunity.
Central banks drive unprecedented gold demand
Central bank gold purchases have reached historic levels, with nearly 400 tons acquired in the first half of 2022 alone - the fastest pace in 55 years. By July 2024, global purchases hit a near 14-year high.
This surge represents a significant shift, as central banks have transformed from net sellers to aggressive buyers over the past decade. Major institutions in Russia, China, India, Poland, and Hungary have substantially increased their gold reserves.
The primary motivation behind this trend is diversification, with central banks seeking to reduce their exposure to currencies and bonds. With global debt at record levels, gold serves as a crucial hedge against market risks.
These substantial purchases from central banks have created sustained upward pressure on gold prices, contributing to the record highs made near the $2,800 per troy ounce mark just a few weeks ago.
Geopolitical tensions boost safe-haven appeal
Russia's invasion of Ukraine in 2022 triggered significant market volatility, prompting investors to seek refuge in gold trading.
The 2021 to mid-2023 spike in inflation further enhanced gold's appeal as a store of value. Major economies like the US and Europe experienced 40-year high inflation rates which have since then died down.
Despite inflation moderating since mid-2023, investors continue to view gold as an attractive how to trade gold option for preserving purchasing power.
The combination of geopolitical uncertainty and inflation worries, even after president-elect Donald Trump’s victory in last week’s US presidential election, has established a robust foundation for sustained gold demand among institutional and retail investors alike.
Even if, as some hope, the 47th president of the United States of America might be able to help end the war in Ukraine, concerns about his foreign policy could potentially facilitate an invasion of Taiwan by China. Meanwhile the risk of an escalation between Israel, Iran and its proxies remains high.
Trump’s pledge to impose tariffs of between 10%-to-60% on imports, even on US allies, such as European car makers, could lead to retaliatory tariffs being imposed on US exports, potentially creating another inflationary spiral which should lead to a higher gold price.
Recovery in jewellery demand adds momentum
The post-Covid 19 pandemic recovery has sparked a significant rebound in gold jewellery fabrication, as global lockdowns eased and consumer confidence returned to the market.
Cultural factors play a crucial role in maintaining strong jewellery demand, particularly in regions where gold holds traditional significance for weddings and gift-giving.
The World Gold Council projects continued growth in annual jewellery demand, driven by increasing wealth in developing nations. India and China's large populations represent substantial untapped demand for gold products.
This resurgence in jewellery demand adds another layer of support to the overall gold investment case.
Supply constraints support higher prices
Despite rising prices, gold production has remained relatively flat over the past decade, creating a significant supply-demand imbalance.
Several factors constrain output, including declining ore grades, scarcity of major new deposit discoveries, and heightened political risks in key producing regions. Environmental concerns have also limited expansion of mining operations.
These supply limitations, coupled with robust demand, suggest that higher gold prices may persist for the foreseeable future. The tight supply situation provides fundamental support for gold prices, making it an attractive market for both trading and investment purposes.
Long-term outlook remains positive
Gold's performance over the past year, up around 35% year-to-date in late October, has proven competitive with traditional assets like stocks and bonds, while offering portfolio diversification benefits.
The $200 and 6% drop in the gold price from its at $2,790.17 per troy ounce October record high to this week’s low at $2,589.73 amid de-escalation in the Middle East and the removal of much uncertainty following Donald Trump’s clear and rapid presidential election win, might represent a long-term buying opportunity.
From a technical analysis perspective, buying gold around the $2,600 mark may be of interest to investors, since the February-to-November uptrend line is currently offering support.
Spot gold daily candlestick chart
A continued decline and weekly chart close below the 18 September low at $2,546.86 could lead to a deeper correction, though.
Longer-term the precious metal's endurance as a store of value through centuries of economic cycles continues to attract investors seeking stability in uncertain times.
Market analysts generally maintain positive price forecasts, supported by the combination of central bank buying, investor demand, and supply constraints.
For traders considering this market, our trading platform provides advanced tools and features for executing gold trading strategies.
This information has been prepared by IG, a trading name of IG Australia Pty Ltd. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.
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