Gold prices have surged to $1,860 per ounce, prompting global investors to reminisce about the time when gold 'rallied' from $1,000 per ounce to peak at around $1,920 per ounce between 2009 and 2011.

The global economic situation then and now shares similarities, such as a worldwide economic contraction that has led central banks in various countries to stimulate the economy through both monetary and fiscal policies. However, the causes of the economic contraction differ; this time, it is primarily due to the COVID-19 pandemic.

Nevertheless, if we look back at the movement of gold prices during this period, we can see signs of an upward trend since mid-2019, a time before the COVID-19 outbreak. Therefore, the factors driving gold prices up this time are not solely due to the pandemic, but can be summarized into five main points:

Firstly, the weakness of economies worldwide has led central banks to attempt to stimulate their economies through accommodative monetary policies, injecting more liquidity into the system and continuously lowering interest rates. This has resulted in government bond yields dropping to similar levels, making gold a more attractive alternative investment asset.

Secondly, geopolitical tensions have created uncertainty, as seen in the case of the U.S. and China, which has been ongoing since 2019, along with concerns about wars stemming from international conflicts in recent times, such as the U.S.-Iraq conflict in early 2020. These 'risks' have encouraged investors to seek safe-haven assets like gold, which can preserve investment value during market volatility.

Thirdly, the COVID-19 pandemic has been an unforeseen factor that has helped push gold prices above $1,600 per ounce earlier this year. The pandemic has caused economic activities to come to a halt, exacerbating the global economic downturn and prompting central banks to inject even more liquidity into the economy.

Recently, the European Central Bank approved a recovery fund with a liquidity injection of €750 billion, reminiscent of 2009 when the U.S. Federal Reserve continuously injected liquidity, raising concerns about rapid inflation, which in turn increased the demand for holding gold.

Fourthly, the weakening of the U.S. dollar is another factor. Theoretically, the dollar's value is inversely related to gold prices; as the dollar, the world's primary currency, weakens, gold prices tend to rise as a means to preserve value against the dollar. The dollar's depreciation and the rise in gold prices are partly due to the continuous increase in U.S. public debt, raising concerns that the U.S. may not be able to repay its debts, leading to a decrease in the dollar's future value.

Fifthly, the increasing demand for gold holdings, particularly from various gold funds worldwide, such as the SPDR Gold Trust, the largest gold bullion investment fund in the world, which recently announced an increase in gold holdings by 0.7% on July 21, bringing its total to a record high of 1,219.75 tons. Additionally, central banks around the world have been increasing their gold reserves.

For instance, the Central Bank of Russia has been continuously purchasing gold for its reserves, accumulating $120 billion in gold reserves, having bought over $40 billion worth of gold in the past five years.

SOURCE : www.bangkokbiznews.com