Gold prices have been soaring, with a 20% increase over the past six months, reaching more than $2,000 per ounce. This puts it close to its all-time high of $2,075. While some experts believe that gold's rally is just beginning, others remain skeptical about its potential for further gains. This article examines the factors driving gold prices higher.

One of the primary catalysts for gold's rise in 2023 has been the outlook for interest rates. The Federal Reserve has been aggressively raising interest rates for over a year in its ongoing battle to curb inflation. Recent inflation numbers suggest that the Fed is making progress in getting prices under control. Additionally, an unexpected banking crisis in March tightened the credit market, which may have helped cool the economy and slow inflation. Investors now anticipate that the Fed will pause rate hikes and pivot to rate cuts sooner than previously anticipated, with a 70% chance of one more quarter-percentage point Fed rate hike in May and a 56% chance of a rate cut by July.

Gold is often considered an alternative universal currency that does not earn interest payments or generate cash flows. Historically, it has had a negative correlation to interest rates, which has held true recently as gold prices rallied to new highs while the outlook for interest rates dropped. Furthermore, gold is seen as a safe haven if rising interest rates trigger a recession and impact corporate earnings. Michael Landsberg, chief investment officer at Landsberg Bennett Private Wealth Management, advises investors to be patient and consider non-stock and bond assets, like gold and the U.S. dollar, to lower risk and potentially increase returns.

Another factor influencing gold prices is its historical negative correlation to the U.S. dollar. A weak dollar means investors pay more for the same amount of gold. Psychological factors also contribute to this negative correlation, as many investors see an immutable, intrinsic value in gold tied to its utility and unique physical properties. When confidence in fiat currencies wanes, they turn to gold as a safe haven asset. The collapse of Silicon Valley Bank and other institutions in March rattled confidence in the U.S. financial system and the dollar, further boosting gold demand.

The U.S. Dollar Index (DXY) is down 1.3% year-to-date, while the price of gold is up more than 10%. If the Fed begins to loosen its monetary policies in the second half of the year, the dollar could face additional pressure. Eurizon SLJ Capital recently predicted that the dollar could fall another 10% to 15% by mid-2024, a potentially significant drop for the world's reserve currency.

Gold reached its all-time high of $2,075 in August 2020, but many analysts expect it to surpass that peak in 2023. CMC Markets recently predicted that a Fed pivot would trigger a sell-off in the U.S. dollar and tank bond yields, sending gold prices up to between $2,500 and $2,600 per troy ounce. Randy Smallwood, CEO of Wheaton Precious Metals (WMP), forecast gold prices to hit $2,500 per ounce. Swiss Asia Capital's managing director and chief investment officer Juerg Kiener predicted that mild global recessions in 2023 could send gold's price as high as $4,000 an ounce by the end of the year.

Bank of America analyst Lawson Winder believes a weaker U.S. dollar will drive gold prices higher by the end of 2023, with an annual average price of $2,009 per ounce. The Bank of America commodities team forecasts gold price per ounce will reach $2,200 in the fourth quarter.

Gold prices are also influenced by supply-and-demand dynamics. Global gold demand increased 18% in 2022 to 4,741 tons, according to the World Gold Council. Jewelry is the largest global driver of physical gold demand, followed by central banks buying and holding gold to diversify their reserves. Gold is also used in industrial and electrical devices and processes, and investors directly fuel demand for gold bars, coins, and metals. Physically backed gold exchange-traded funds must constantly add to their gold holdings.

DataTrek Research co-founder Nicholas Colas says rising gold prices tend to stimulate global gold ETF demand, which peaked at between $10 billion and $11 billion per month in recent years. Colas recommends considering a 3% to 5% position in gold as part of a diversified portfolio.

While adding a small amount of gold to a diversified investment portfolio is a common recommendation among wealth managers and investment advisors, there are also reasons not to go all-in on gold. Gold has historically lagged the performance of the S&P 500, which has produced an average annual return of 10.2% since 1971. Additionally, gold does not pay dividends, earn interest, or generate cash flow or revenue.

Investors can invest in gold through various means, including physical gold, gold futures and options contracts, gold stocks, and gold ETFs, trusts, or mutual funds. However, it is essential to understand the complexities and risks associated with each investment method before diving in.