Gold Is Up Sharply in August. What's Driving It Higher?

Gold is on the rebound.

The price of the yellow metal hit an all-time high of $5,354 an ounce in late January, then fell 25% over the next five months, dropping below $4,000 an ounce by mid-July.

But the price has risen sharply in August. As I write this, it's trading at around $4,400 an ounce, a gain of 8% in less than two weeks.

Image source: Getty Images.

And some analysts think it will continue to climb. Last week, investment bank UBS forecast that gold would reach $5,000 again in the first half of 2027, bringing it back near its record high.

What's suddenly driving the gold price higher?

Well, I recently wrote about the current rebound in silver prices. But that dynamic is different from gold's. Silver's price is currently being driven by demand from artificial intelligence (AI) data center construction, as the white metal is a critical input to those facilities due to its high conductivity, corrosion resistance, and stability.

By contrast, the factors driving the gold price tend to be macroeconomic in nature, including inflation, currency movements, and monetary policy, among others.

Many economists expect yields on Treasury securities to fall in the coming months as inflation eases and the likelihood of a Federal Reserve interest rate hike diminishes. Futures markets assign a 50% chance that the Fed will leave its target rate as is at its next monetary policy meeting in mid-September. Just a month ago, futures traders were betting heavily on a hike at that meeting.

Much of the change is due to a weak July jobs report, published last week. With the labor market apparently weakening, a rate hike by the Fed is less likely.

And when bond yields and interest rates are falling, or at least not rising, gold is more attractive to investors. By contrast, when rates and yields are higher, the opportunity cost of holding gold, which pays no income, is also higher.

A weaker dollar is good for gold

Similarly, the dollar has been weakening in recent weeks due to concerns about large U.S. fiscal deficits. When the dollar is weaker, investors tend to buy more gold.

Finally, since the Russian invasion of Ukraine in 2022 and the U.S. response of freezing Russia's foreign exchange reserves, many central banks around the world have been stocking up on gold to diversify away from the dollar. It's an ongoing trend that has significantly bolstered gold's price in recent years.

Investors interested in allocating a small portion of their portfolios to gold to hedge against inflation and market pullbacks should consider two funds: SPDR Gold Shares (NYSEMKT: GLD) and iShares Gold Trust (NYSEMKT: IAU), both of which own physical gold bullion.

Gold can be a good way to diversify and protect your portfolio with an asset that doesn't move with the stock market.

Matthew Benjamin has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.