The price of gold, close to historical records: 2,400 dollars/ounce
The price of gold increased from $1,991 on February 13 to nearly $2,400 on April 12. This is one of the most pronounced increases in the price of the yellow metal. But according to the experts of Tavex group, renowned for their expertise in the investment gold segment, there is a strong likelihood that further growth potential remains.
“The recent substantial surge in gold prices has caused ripples throughout the financial sphere. Despite gold prices soaring to record levels of $2,400 per troy ounce, they have yet to surpass previous highs. Often, we assess the international gold price without factoring in inflation. If we adjust the gold price for inflation, the current price of $2,400 falls slightly below the peak of $2,467 reached in August 2020. The current value is even lower than the all-time high reached in the 1980s – over $2,600, adjusted to inflation”, says Victor Dima, Manager of the Treasury Department, of Tavex Romania.
Not only does the price of gold hold significant growth potential before it truly hits a new record high, but it’s highly probable, given the current global economic landscape. The gold price trend is to hover within the $2,400 – $2,600 range, but this doesn’t preclude the possibility of seeing increases beyond this scope, according to Tavex experts. Furthermore, data indicates that the central banks of the BRICS countries are buying gold at a frantic pace and betting on gold to protect their financial wealth from the erosion of the value of fiat money. The years 2022 and 2023 witnessed the most significant gold purchases in decades, with each years marking more than 1,000 tonnes of gold bought by central banks.
What influences the price of gold?
The price of gold is correlated with the purchasing power of money, real interest rates, and thus with monetary policy. We are talking in particular about the policy of the Federal Reserve, the US central bank (Fed). Following the inflationary wave of 2021-2022, the Fed began to raise interest rates, and today they stand at 5.25-5.5%, as opposed to 0.25% at the beginning of 2022. At the same time, the yield on US ten-year is over 4.5% today, compared to 1-2% in 2021.
The US Federal Reserve cannot afford to cut interest rates due to high inflation. At the same time, it cannot keep them at their current high values (above 5%) because it risks excessive US indebtedness. Each percentage point adds about $723 billion to the federal public debt and destabilizes the financial system. In short, inflation cannot be controlled, and the depreciation of fiat money, and thus of reserve assets such as the US dollar, will continue.
Moreover, the increase in interest rates from 2022 onwards has devalued the assets issued in the past, in colossal amounts, especially during the pandemic. This devaluation led to multiple bankruptcies of various American banks a year ago, starting with Silicon Valley Bank. The situation could have spiraled out of control and risked a repeat of the bank failures of 2008, if the Fed had not intervened urgently. Any further rise in interest rates would exacerbate the problem of asset devaluation.
On the other hand, it will be very difficult for interest rates to be reduced and maintained at levels close to zero. Such low interest rates would mean negative real interest rates, and major buyers of US Treasuries would no longer be willing to accept negative yields. China, the world’s second largest buyer of US Treasuries, has been significantly shedding massive amounts of US Treasuries for several years now, and this is just one part of a long process.
China currently holds nearly $800 billion worth of U.S. Treasuries, compared with more than $1.3 trillion ten years ago. Between January 2022 and December 2023, China’s holdings of US bonds fell by more than $200 billion. In short, the Fed is in a difficult spot, especially as long as global economic and geopolitical conditions do not change urgently.
What can come next?
Thus, in the current context, inflation cannot be fully controlled. Annual price increases in developed countries such as the US are unlikely to fall below 2%, as they were before the pandemic, and will remain significantly higher. At the same time, we will live in a world where inflation is relatively high (4-5%), and interest rates will also be relatively high (2-4%). Although relatively high, interest rates will not exceed inflation, and thus the value of money will continue to decline and the yield on government bonds will remain negative.
In such a scenario, especially considering geopolitical tensions, gold is a very attractive asset, not only for private investors, but also for central banks.
About Tavex
As the largest trader of investment gold in Northern Europe and an increasingly important player in the Romanian and Southeastern European market, Tavex has been an important member of the Tavex Group since 1991. Tavex opened its doors in Romania in 2019 and already has 3 offices in Bucharest and 1 in Cluj. Tavex offers high-quality investment products from physical gold, silver and currency. It specializes in offering investment gold, including gold coins and gold bars, as well as investment silver, while providing attractive exchange conditions for over 55 types of currency.
Tavex is not just a place to invest in gold and exchange currency. Tavex is on a mission to make the world of finance more accessible and easier to understand. We believe in gold and the security it brings to everyone.
