Central banks are buying record amounts of gold and its price has soared in 2023, so is the precious metal a good way to diversify your investments?
the war in Ukraine and a falling US dollar, pushed demand for gold to its highest level in 11 years, with prices in January at a nine-month high of $US1937 per ounce.
Gold is one of Australia’s major exports behind iron ore and coal. It is also the world’s second-largest gold producer behind China, with Australia’s national exports up 23 per cent in the September quarter to a cash value of $6.7 billion. In 1971, the US government abandoned its commitment to exchange US dollars for gold on request, to switch to a paper money system that allowed the US central bank to finance the Vietnam War. Before that point, the price of gold had not moved substantially for hundreds of years.The value of the US dollar as well as risk-free interest rates are probably the two main drivers of the gold price.
It’s important to consider higher interest rates as a corollary of inflation that actually serves to pressure the gold price lower. The below chart shows that as the risk-free yield on the bonds falls, the gold price rises, and vice versa.Technically, real interest rates in the US are still negative as the US Federal Reserve’s cash rate – which is between 4.25 per cent and 4.5 per cent – was lower than inflation of 6.5 per cent in December. This means real interest rates are negative 2 per cent.
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