High gold price reflects credit crisis of US dollar

International gold prices have hit record highs recently, with London's spot gold price surpassing $3,050 per ounce on Thursday. The traditional analysis framework has realigned, with gold's value inversely linked to US dollar and US bond yields.

Changes in market dynamics impact gold pricing. Gold serves as a currency, commodity, and financial asset, offering risk mitigation and inflation protection. Factors influencing gold's monetary attributes include exchange rate trends, credit risks, and foreign reserve changes. Commodity attributes are affected by retail consumption, industrial demand, mining activities, and recovery rates. Financial attributes are influenced by the US Federal Reserve's monetary policy.

The Federal Reserve opted to maintain the federal funds interest rate target range at 4.25 percent to 4.5 percent during its March meeting and signaled a gradual slowdown starting in April. This decision, coupled with the Fed's cautious approach led to a modest increase in gold prices, and a weakening US dollar. These movements align with the expectation of ongoing interest rate cuts by the Federal Reserve throughout the year.

The current gold market faces a key driver due to the tariff strategies of the Donald Trump administration that potentially undermine US economic growth and the US dollar's global status. Continued tariff implementations may weaken the US economy, erode trust in US dollar reserves and the US administration's credibility.

The short-term focus of the US administration and the fiscal challenges have prompted central banks worldwide to reduce US dollar reserves and increase gold holdings. In January, global central banks collectively purchased 18 tons of gold, primarily led by emerging economies. Developed countries such as the US, Germany, France, and Italy have long held substantial gold reserves, and today it is emerging market central banks that are leading net gold purchases. This trend has spurred investor interest and bolstered gold prices.

Central banks' gold acquisitions have elevated prices, with gold's role as a safe haven asset becoming increasingly prominent. In 2024, total gold demand reached 4,974.5 tons, driven by central bank purchases, global investments, jewelry demand, and technological uses. Notably, demand stems largely from retail purchases such as jewelry and gold bars, with central bank acquisitions influencing market prices and driving over-the-counter demand.

That being said, the "America First" policies of the US will continue to fuel the rising price of gold, as they will increase the uncertainties in the global financial sector and the world economy.