The Fear That Determines Gold Prices: Investor Preferences

Fundamental Dynamics of Gold Prices

In global markets, investors are continually discussing the ever-changing gold prices. Despite a decline from record levels last week, gold continues to be the asset that has yielded the most returns for investors in 2023. Economic analyses have sparked various discussions on the sources of this price increase. However, experts agree that it is essential not to complicate this situation too much.

As Demand Increases, Prices Rise

According to experts, the primary reason for the increase in gold prices is the growing interest of investors in this precious metal. For instance, gold prices are expected to rise by 66% by 2025, reaching $4,400 per ounce. This indicates a performance significantly above that of the stock markets. Since late 2022, especially following Russia’s invasion of Ukraine, gold prices have been on the rise. The U.S. freezing of Russia's dollar assets has led many countries to shift their reserves from dollars to gold.

High Inflation Fears Affect Investors

Recently, the fear of high inflation and the devaluation of currencies to reduce public debts has emerged as a significant factor influencing investors' decisions. Under these conditions, many fund managers are turning to gold as a hedge against risks in stocks and government bonds. However, there are also criticisms regarding gold's limited reliability as an inflation hedge.

Increasing Demand and Tight Market Conditions

The interest of investors in rising gold prices is further heightened by an influx of individual investors. For example, the Royal Mint in the UK reported that the demand for gold purchases has quadrupled compared to the previous year, and their online traffic has doubled. A representative from the Mint highlighted the challenges in product availability, stating, “We are continuously replenishing our inventory of gold coins on the ground.” O'Reilly emphasized that there is 1 seller for every 10 buyers, whereas this ratio is normally expected to be around one-third.

Market Fluctuations and Expectations

With the recent increase in demand, gold prices have fluctuated. Recently, prices approached the $4,400 level but ultimately fell below $4,100. However, this decline is considered a minor setback for the market. Most investors have still realized significant gains. There is no need to invoke complex theories such as “collapse of the monetary system” or “geopolitical realignment.” The simplest explanation for the rise in gold prices is the direct effect of increasing demand for this precious metal.