The gold price hit an All-Time High

This week, the price of gold reached a new high, just as bitcoin reached an all-time high and the S&P 500 crossed 5,000 for the first time ever.

As of Thursday afternoon, spot gold was trading at $2,160 per troy ounce, up more than 8% since mid-February and far exceeding the previous record set in December when gold reached $2,135 per troy ounce.

What exactly is going on? For starters, gold has an inverse correlation with the US dollar, which has been weakening over the last three weeks as the Federal Reserve remains unsure about interest rate cuts. As a result, gold is now at a record high.

How the Federal Reserve’s policy affects gold prices

Overall, gold is benefiting from investor optimism about US monetary policy and expectations of lower interest rates.

On Wednesday, Federal Reserve Chair Jerome Powell clarified that interest rate cuts will be possible “at some point this year” if the economy moves as expected and inflation continues to fall. Gold prices typically rise as interest rates fall, which may occur sooner than some analysts predicted.

The CME Group’s FedWatch Tool predicts that the central bank will lower the federal effective funds rate at its June meeting by 73.9%. This could serve as a long-term catalyst for gold prices into the second half of the year.

Other reasons why gold is currently up

Physical gold does not yield like dividend stocks or interest-bearing debt instruments such as certificates of deposit or Treasurys, so holding it when bond yields are high has an opportunity cost. However, recent declines in the 10-year Treasury yield — which is now 4.11%, down 17.6% from its one-year high — are supporting gold prices as investors seek higher potential gains than Treasury notes are currently offering.

Furthermore, investors are frequently drawn to gold because it serves as a safe haven and performs well when global markets are volatile. Geopolitical conflicts, such as the wars in Ukraine and Gaza, may have contributed to the recent increase in gold prices.

Another factor supporting prices has been central bank gold purchases since 2022, particularly by China, which increases demand for the precious metal. This trend continued throughout 2023 and has continued into 2024, with central banks reporting that gold reserves increased by 39 tons in January, more than doubling the amount purchased in December and marking the eighth consecutive month of net purchases.

Is it worthwhile for investors to buy gold?

Gold can be a useful asset for diversifying an investment portfolio, but financial advisors advise against putting more than 5-10% of your money in it. While gold is on a roll, there is a risk that prices will fall if inflation readings are high or jobs numbers are strong, for instance.

However, as a store of value, the precious metal frequently benefits long-term investors over short-term speculators, the former of whom can buy physical gold or invest in equities such as gold miner stocks and gold-leveraged exchange-traded funds.

Finally, whether or not to include gold in a portfolio should be determined by personal investing preferences and financial goals, but investors may be in for a good year with the bright yellow metal.