The price of gold is determined by both demand and supply factors. There are several factors on the demand side that determine the short-term price of gold. This includes the value of the US dollar against foreign currencies and the development of expectations regarding the future policy of the US Federal Reserve.

In addition, there is also a long-term demand factor in the form of gold purchases by central banks. Furthermore, the supply of gold mines also has a strong influence on the price of gold, which also becomes apparent in the long term.

Gold in a long-term uptrend Source: stockcharts.com

Central banks as gold buyers determine the overall uptrend in gold Gold is the oldest continuously used currency in the world with a history of almost 5,000 years. Therefore, central banks around the world clearly consider gold as a currency – or at least as a reserve currency – and this has been especially true since they were greatly alarmed by the global financial crisis in 2008.

The years when central banks set interest rates near zero or even in negative territory, combined with quantitative easing (QE), have led to growing distrust of other fiat paper currencies since the financial crisis. This has prompted many central banks to prefer gold over the currencies issued by other central banks.

Interestingly, neither the recent uptrend in interest rates nor the departure from quantitative easing in recent years have been able to dispel these concerns.

Since the financial crisis, global central banks have been on guard and buying gold Source: CPM Group Gold Yearbook 2023, CME Economic Research Calculations, Bloomberg Professional (CPI INDX)

Since the financial crisis, global central banks have realized that gold is their safe haven The gold purchases by central banks since the financial crisis stand in stark contrast to the time when central banks were net sellers of gold from 1982 to 2007. This means that before the financial crisis, central banks trusted fiat paper currencies like the US dollar, euro, yen, pound, and Swiss franc more as currency reserves than gold.

However, this relationship has since reversed. And it has only intensified during times of crisis, such as after the global financial crisis in 2009, after the euro crisis in 2012, during the COVID-19 pandemic, and once again since the start of the Russian war against Ukraine.

This trend will almost certainly continue in 2023, even though interest rate hikes by central banks have brought the yields of fiat currencies to their highest level since 2007.

Conclusion: Gold is the safe alternative currency Central banks are not the only ones considering gold as a currency. Strong and consistently negative correlations between gold and the dollar index show that traders are also willing to see gold as an alternative to the US dollar. That is why I do not pay much attention to the short-term fluctuations caused by the daily changing signals regarding Fed rate cuts. I am interested in whether gold will still be a valuable investment in 2, 10, or 20 years. My answer: Yes, it will be.

The current fluctuations in the markets offer excellent opportunities for gold purchases. The same goes for purchases of undervalued gold stocks.