Falling interest rates make gold more expensive than ever

On Friday, the price of the precious metal rose to 2,612.73 US dollars (around 2,340 euros) per troy ounce (around 31.1 grams) on the London Stock Exchange, making it higher than ever before. The price thus reached a record high for the third time this week. The strongest price driver remains the prospect of falling interest rates.

The price also reached another record in euros just before the weekend: 2,339.75 euros per ounce. With the latest price jump, gold has risen in price by more than 3 percent since the beginning of the month. Since the beginning of the year, the precious metal has gained around 25 percent in value.

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The strongest price driver is falling interest rates. In particular, the significant reduction in the key interest rate by the US Federal Reserve of 0.50 percentage points on Wednesday increased demand on the gold market. Previously, the European Central Bank (ECB) had reduced the currently most important key interest rate, the deposit rate, for the second time this year last week, by another 0.25 percentage points.

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Since gold itself does not pay interest, the prospect of falling interest rates on government bonds, for example, makes the precious metal more interesting for investors. In addition, major central banks such as the Fed and the ECB have only just begun to turn around interest rates and further interest rate hikes are expected in the coming months.

“The precious metal is on a clear upward trend,” said precious metal trader Alexander Zumpfe of Heraeus, commenting on the price development. The prospect of further interest rate cuts makes the precious metal attractive, even if future interest rate hikes have already been partially priced in.

However, the high price of gold is now having an impact on demand for gold jewelry. Commodity expert Barbara Lambrecht pointed out that China has recently imported significantly less gold. Imports in July were only 44.6 tons, the lowest level since two years ago. “Jewelry demand is weakening and only investment demand is intact,” Lambrecht commented on trading activity.

According to commodity trader Zumpfe, short-term profit-taking on gold is also possible. In general, however, “lower interest rates and a weaker dollar continue to support investor interest.”