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Gold’s Rally Continues: Significant Market Shift

INVESTINGGold's Rally Continues: Significant Market Shift

The past few months in the gold market seem to have been quite turbulent. In April, we witnessed new dollar records, the end of April and early May brought a slight correction, but by May another all-time high was reached. What’s causing this volatility? The answers lie in the American economy, but not exclusively there.

Inflation in the USA is the main factor influencing gold prices in the short and medium term. The Federal Reserve’s decisions on interest rates are dependent on inflation, and a rate cut – which seems more likely – would reduce the attractiveness of interest rate-based assets such as government bonds, compared to gold.

The problem with inflation is that while we saw a clear decline in June last year, in subsequent months it has remained in a relatively flat range of 3-3.5%. This is far from the inflation target of 2% in the USA. This is the main cause of current fluctuations, specifically the fact that the actions taken by the FED so far are not yielding results. This leads us to conclude that there is still some chance that rates may not be lowered and may even rise instead.

Why will gold prices rise in the long term?

Commodity analysts at the Swiss investment bank UBS expect gold prices to reach a new record level of around $2,500 in September, and even $2,600 per ounce by the end of the year. They also predict that by June next year, we could see an ounce of gold priced at $2,700 (likely exceeding 10,000 PLN in Polish currency).

Three main factors are expected to lead to this situation: the same three factors that are already well known to us: FED interest rates, demand from central banks, which has reached record levels in recent years, and geopolitical uncertainty – primarily Russia, the Middle East, and Taiwan.

Similar forecasts were found in a recent report by Incrementum AG from Liechtenstein, which also highlighted these factors. Additionally, Incrementum emphasizes the growing role of Asia in the global gold market. So far, China and India have been the largest consumers of jewelry, together accounting for about 1/4 of global gold demand. This also includes demand from central banks and investment demand.

Recently, central banks – including those in Asia – have been increasing their purchases, as has investment demand in China. This applies to both physical gold and record demand from gold-backed ETFs.

It is becoming increasingly clear that purchases in Asia are able to influence gold prices more than purchases in the Western world. This means that the FED’s decisions, interest rates, and the US dollar are factors that mainly determine the short and medium term. This represents a historical, global change in the market rules.

Gold and the Polish context

The price of gold in Polish currency usually behaves somewhat differently than in US dollars. Gold becomes more expensive when the dollar weakens. Consequently, it also weakens against the Polish zloty, so the price in Polish zloty may rise but with less dynamism. In the short and medium term, złoty-denominated quotations may also be subject to fluctuations, but in the long term, the relationship between the dollar and gold may be disrupted. This will make these regularities not necessarily applicable. However, it is worth observing the złoty, especially since an increase in inflation is expected this year.

It is also noteworthy that the National Bank of Poland is steadily increasing its gold reserves. In April, another purchase was made, and by the end of that month, Poland’s gold reserves amounted to about 363.4 tons. This is a continuation of the plan to increase Poland’s gold reserves to 20% of total foreign exchange reserves (currently about 13%), which is ultimately aimed at increasing the security and stability of the Polish monetary system.

Michał Tekliński, Director of International Markets at Goldenmark Group

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