Gold reached a record high of nearly US$4,300 an ounce on April 2, as reported by Asia Times’ Global Risk-Reward Monitor. This milestone reflects a complex interplay of factors influencing the precious metal’s price.
Analysis reveals that gold is not only a safe haven during times of geopolitical turmoil but also functions as an industrial metal, with about 11% of its demand coming from industrial applications. The strong correlation between gold and industrial metals, particularly copper, underscores this dual nature of the precious metal.
Furthermore, gold operates as a hedge against currency depreciation, with a clear inverse relationship noted between gold and the Japanese yen and the Euro. The weakening of major developed-market currencies due to unsustainable fiscal policies adds to the demand for gold as a store of value.
A regression analysis of the gold price against TIPS yields, industrial metals, and currency weakness suggests that the geopolitical risk premium contributes about 23% to the gold price, indicating heightened global uncertainties. This premium has increased during past crises, such as the European financial crisis in 2011 and the Covid-19 outbreak.
Despite these indicators of rising risk, gold’s surge is also influenced by factors such as fiscal challenges in Japan and Europe, as well as strong demand for industrial metals. This suggests that while the world is facing increasing geopolitical tensions, the rise in gold prices may not necessarily signal the impending end of the world but rather a response to a complex economic landscape.
