Gold has been strengthening as an alternative asset to the depreciating U.S. dollar – as the USD weakens, gold becomes cheaper for foreign investors and also acts a better store of wealth. Moreover, global central banks have been cutting interest rates, which have weighed on their respective currencies.
“There’s a gradual loss of confidence in central banks’ ability to help or control the economy or control the money supply and gold is a form of money so it competes with other forms of money for consumers,” Jim Rickards, author of The New Case for Gold, told the Financial Times “As you begin to lose confidence in central bank money, that leads to increased interest in gold.”
Demand for gold assets have surged this year. For instance, ETF flows into gold have expanded at their fastest pace since 2009. Physically backed gold ETF holdings are still one-third below the December 2012 peak, which suggest that prices can hold at about $1,200 per ounce.
However, emerging market demand for gold has not picked up yet. For instance, China has shown little demand, with the Shanghai Gold Exchange seeing little growth in volume. While the higher prices may have deterred Asian buyers, demand could pick up if prices persist in going higher, analysts said.
Lastly, a Brexit will trigger greater volatility and push more toward gold as a safety play. According to HSBC, gold could benefit from a “sizeable safe haven bid,” attracting some of the capital outflows form the pound and euro.