The price of gold is skyrocketing. Here’s why and whether it will continue

price of Sleep It rose above US$4,100 (A$6,300) an ounce for the first time on Wednesday, extending this year’s extraordinary rally by more than 50%.

The pace of growth has been much faster than analysts had predicted and total gains have been almost 100% since the current round began in early 2024.

rising price of Sleep It has captured the hearts and wallets of investors and has resulted in long queues of people forming outside gold dealers in Sydney to get their hands on the precious metal.

What is the reason for the rising price of gold?

Several reasons have been suggested to explain the current record gold rush. These include rising levels of government debt and greater economic uncertainties from the current US government shutdown.

Concerns are also increasing about the independence of the US Federal Reserve. If political intervention pushes US interest rates down, a resurgence in inflation could be seen. Gold is traditionally seen as a hedge against inflation.

But these factors are unlikely to be the main reasons behind the huge rise in gold prices.

For starters, the price of gold has been on a steady upward trend for the past few years. This is long before any of those factors emerge as issues.

A more likely explanation for the current gold price rally is increased demand from gold exchange-traded funds (ETFs).

These funds track the movements of gold, or other assets such as stocks or bonds, and are traded on a stock exchange. This makes assets like commodities more accessible to investors.

Before the first gold ETF was launched in 2003, it was considered very difficult for regular investors to gain exposure to gold.

Now that gold ETFs are widely available, gold can be traded like any other financial asset. Investors’ view appears to be changing regarding gold’s traditional role as a safe-haven asset in times of political or financial turmoil, when other assets such as stocks are riskier.

In addition to retail investor demand, some emerging market economies – particularly China And Russia – They are shifting their official reserve assets out of currencies like the US dollar and into gold.

According to the International Monetary Fund, central banks’ holdings of physical gold in emerging markets have increased 161% since 2006 to about 10,300 tonnes.

To put this in perspective, the share of gold in emerging markets grew by only 50% in the 50 years to 2005.

Research shows that the shift to gold by emerging market economies is due to the increased use of financial sanctions by the US and other governments that represent the major reserve currencies (US dollar, euro, Japanese yen and British pound).

In fact, Russia became a net buyer of gold in 2006 and accelerated its purchases after the annexation of Crimea in 2014. It now has one of the largest reserves in the world.

Meanwhile, China is selling its holdings in US government bonds and switching to buying gold in a process called “de-dollarization”. He wants to reduce his dependence on American currency.

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Emerging market central banks have also increased their gold holdings following Russia’s exclusion from the international payments system called SWIFT and a proposal by the US and European governments to seize Russian central bank reserves to help fund support for Ukraine.

Further de-dollarization efforts by emerging market economies are expected to continue. Many of these economies now view major Western currencies as having unwanted exposure to financial sanctions. This is not the case with gold. This may mean that financial sanctions will become a less effective policy tool in the future.

Can gold run further?

Ongoing demand from Russia and China and demand for gold ETFs from investors means that the price of gold may rise further. Both factors represent continued growth in demand, in addition to existing demand for jewelery and electronics.

Further price increases are likely to increase ETF inflows through the “fear of missing out” effect.

The World Gold Council last week reported record monthly inflows in September. For the September quarter as a whole, ETF inflows stood at more than US$26 billion and for the nine months to September, fund inflows totaled US$64 billion.

In contrast, central bank gold demand in emerging markets is less influenced by price and more driven by geopolitical factors, which supports increased demand for gold.

Based on these two drivers, Goldman Sachs analysts have already revised their price target for gold to US$4,900 an ounce by the end of 2026.

Why is the gold lead a win for Australia?

What does the current rise in gold mean? Australia,

As the third-largest producer of gold in the world, with at least 19% of known deposits, Australia would benefit from further rises in gold prices.

In fact, the Department of Industry, Science and Resources now expects the value of gold exports to overtake liquefied natural gas exports next year.

This would make gold our second most important export after the other “precious” metal: iron ore.