1. Introduction

The international gold price maintains an upward trend, and the spot gold price keeps breaking new highs. On April 12, 2024, COMEX gold reached $2448.8 per ounce during the trading session, with the highest increase since April reaching 8.86% [1], pushing the current market to a new high. The rise in gold prices reflects the complexity and uncertainty of the current global economy. The high gold price is bound to have an impact on the financial market, and the main affected parties in the financial market are the participants in financial transactions, namely individual investors or enterprises, as well as the prices of various financial instruments, exchange rates, and risks in the financial market. The rise in gold prices has impacted society and people's lives, but it also brought development opportunities for the gold market and related industrial chains. By studying the consumption and investment situation of the financial market through the trend of gold prices, people can better prevent and respond to possible financial risks in the future and make reasonable investments.

With the continuous rise in gold prices, people's daily consumption, investment habits, and even the operation of the entire financial market will undergo significant changes. Therefore, it is significant to study the impact of rising gold prices on the financial market. It can help investors plan their funds reasonably, reduce the impact of inflation and currency devaluation, and better cope with changes in international trade and exchange rates. This article aims to elaborate and explore the research topic of the impact of the rise in gold prices on the financial market and corresponding prevention or solutions through literature review, theoretical analysis, reasoning and summarization.

2. Factors Affecting Fluctuations in Gold Prices

Gold is a naturally occurring substance in nature, which not only has commodity properties but also derives monetary and financial properties. The price of gold is one of the most critical indicators in the global financial market, and the sustained rise in international gold prices is influenced by multiple factors[2].

2.1. Supply and demand

From the perspective of commodity attributes, the price of gold as a commodity is influenced by the supply and demand relationship. The demand for gold is mainly determined by four aspects: net purchases by the central bank, jewelry, technology, and investment. Among them, the correlation between individual or corporate investment demand and the trend of gold prices is higher. When investors' confidence in other assets decreases, they will turn to relatively safer gold for investment. When the jewelry industry, financial institutions, and commercial banks increase their purchases of gold, the demand for gold will increase, thereby increasing the price of gold to a certain extent. If the production of gold mines decreases or the recovery rate decreases, the supply will correspondingly decrease, leading to an increase in gold prices.

2.2. International Economic Situation

2.2.1. Monetary Policy

According to data released by the US Department of Labor in the past month, the overall decline in the unemployment rate in March has cooled market expectations for the Federal Reserve's interest rate cut in June. However, there is another possibility: the macro data in March also increased the possibility of a soft landing for the US economy and the probability of secondary inflation, and the rebound in inflation expectations will help push up gold prices[3]. After the monetary policy meeting held in March this year, the Federal Reserve raised its inflation expectations. It maintained its expectation of three interest rate cuts within the year. From an overall perspective, influenced by the expectation of interest rate cuts, market transactions are still very vigorous, providing strong support for the rise of gold prices.

2.2.2. Geopolitical Risks

“In addition to monetary policy, geopolitical uncertainty is often one of the key drivers of gold demand. Continuously geopolitical risks and the upcoming more than 60 leadership elections worldwide may prompt investors to turn to gold[4]” This means that a large-scale geopolitical crisis can trigger investor tension and risk aversion, leading to increased investment in gold and an increase in gold prices.

Financial traders are concerned about geopolitics because geopolitical risks can bring significant trading risks or opportunities. For example, the 2024 US presidential election can be considered the most significant event in the world this year, and the outcome will directly determine the direction of many historical processes. The financial market will only start pricing the election after the end of the two-party primaries, which is a very complex process. In addition, the rise of European stocks is almost entirely due to the relaxation of financial conditions. However, various geopolitical shocks can lead to increased volatility and uncertainty in financial markets, causing fluctuations in stock prices, and European stocks will likely face significant fluctuations this year. The long-term effects can vary widely depending on how the situation evolves and the policy responses from governments and international organizations.

3. The Specific Impact of Rising Gold Prices on Financial Markets

The financial market will be affected by fluctuations in gold prices. The price of gold did not suddenly increase. According to the timeline on the international gold price inquiry website, gold prices have been showing an upward trend since the fourth quarter of last year[5]. After February this year, gold prices suddenly rose rapidly and reached an all-time high in April. Such high gold prices are bound to impact the financial market, which is mainly affected by participants in financial transactions, prices of various financial instruments, exchange rates, and risks in the financial market.

3.1. Individual Investors and Businesses

Experts have indicated that there may be new development trends in the gold market. Gold, as the preferred investment value for hedging, will be recognized by more investors, leading to an increase in market buying and driving the development of the gold market. However, from another perspective, as gold prices continue to soar, the volatility of gold performance may become the main obstacle to sales of gold bars and coins in the coming quarters[6]. The potential fluctuations in gold prices may deter investors, and the possibility of a slowdown in economic growth may also shrink the budget for Chinese consumers to purchase gold.

The rise in gold prices will increase investment value, enhancing investor confidence. When there is uncertainty in the market, investors may be more inclined to purchase gold to protect their assets and obtain higher returns through investing in gold. Moreover, Bank of America has released a report stating that even if the Fed's interest rate cut is delayed, gold prices may still break through the $2400 per ounce mark this year. Even some groups boldly predict that gold prices will rise to $2500 per ounce as early as the end of this year[7].

A commodity researcher said that the re-establishment of long positions in gold futures options by international hedge funds and other asset management institutions has attracted more follow-up buyers to enter, driving gold prices to reach new highs faster. At the same time, investors who buy on dips continue to taste the sweetness, and more and more people are beginning to believe in the logic of rising gold prices[8]. Therefore, the rise in gold prices will have a significant impact on financial traders, and it is necessary to increase investment vigilance.

3.2. The Price of Financial Instruments

In recent years, the Chinese gold market has developed rapidly and has become an important global gold market. Several banks have announced adjustments to their gold deposit business to adapt to market changes. The global gold market shows a prosperous trend driven by the rise in gold prices. The increasing demand for central bank gold purchases and the enthusiasm of private buyers have jointly promoted the prosperity and development of the global gold market. The rise in gold prices will attract more investors to purchase gold, so investors may adjust their asset allocation, thereby reducing demand for other financial instruments such as stocks, bonds, and other assets, leading to a decline in the prices of these financial instruments.

In addition, the development of the gold industry chain will also bring more opportunities to the gold market. The rise in gold prices has benefited gold-related industries such as mining, smelting, and jewellery manufacturing. The growth of these industries not only creates more employment opportunities but also brings considerable tax revenue to the local economy. Moreover, the profits of such enterprises increase, and stock prices are bound to rise accordingly.

3.3. Exchange Rate

From the perspective of the exchange rate, the rise in international gold prices may drive domestic gold prices, which may increase the exchange rate of the domestic currency and have a positive impact. When the international gold price rises, the value of gold assets in countries or regions holding gold increases, thereby increasing its monetary value. This will attract foreign investment to flow into the country or region. Due to the positive correlation between the price of gold and the exchange rate of the domestic currency, an increase in the price of gold usually pushes up the exchange rate of the domestic currency.

On the other hand, the impact of international gold prices on exchange rates is not absolute but also interacts with other factors. Market sentiment and investor expectations can also have a certain impact on exchange rates. When the market is optimistic about the future economic outlook, investors are more inclined to purchase risky assets. In this case, the rise in gold prices may lead to investors gradually leaving the country's currency and the exchange rate falling. In short, the impact of international gold prices on exchange rates is complex and widespread.

3.4. Financial Market Risk

The fluctuation of gold prices may increase the risk of financial markets. Investors may withdraw their funds from the stock market for safer haven assets. This transfer may lead to increased stock market volatility and increased risk sensitivity. As the market gradually heats expectations for the Fed's interest rate cut, more and more Wall Street investment institutions are actively increasing their long positions in gold futures before the rate cut to profit in the upcoming low-interest rate environment[9].

In the international economic and financial situation, changes in monetary policy, especially interest rate adjustments, are important factors to consider when investing in gold. For example, when the international gold price rises, some countries will adopt a tightening monetary policy to reduce the supply of money, leading to an increase in demand for deflation and hedging against deflation, slowing down the degree of domestic gold price rise and thus weakening the risk of financial markets.

4. The Solution of Reducing Losses in The Face of Financial Market Fluctuations

According to relevant data, compared to stocks and bonds, the gold options market is exceptionally active, which means that investor interest is currently mainly focused on gold. The increasing geopolitical risks and expectations of changes in inflation rates make gold a relatively safe investment choice[10]. However, investing in gold also carries risks, and investors must carefully consider their situation and make reasonable investment decisions.

4.1. Assess The Situation and Invest Cautiously

At present, gold is at a historically high level, and many uncertain factors are still affecting its trend, which requires high professionalism from investors. Many analysts predict that once the Federal Reserve starts lowering key interest rates, it will trigger more demand from wait-and-see investors, and gold prices will reach new highs then[11].

Investors should also distinguish between short-term and long-term trends in investing in gold, and choose the appropriate holding time for gold. If gold is chosen as a long-term investment, investors’ assets will be relatively safer. On this basis, more attention can be paid to China's monetary policy and foreign exchange market status to predict the trend of gold prices. Alternatively, if you choose short-term investments, do not ignore to pay attention to the factors that affect gold prices in the short term, which is a key point of understanding and grasping the volatility of the gold market is of utmost importance.

For commodities with strong cyclicality such as gold, enterprises should consider the long-term and not be affected by short-term market fluctuations, but should focus on their long-term value [12]. At the same time, it is also possible to pay more attention to a series of policy tools introduced by the government to stabilize the financial market, and make reasonable use to cope with market risks and reduce losses for enterprises during periods of high gold prices.

4.2. Following Market Rules

Market risk prevention and control measures are also being strengthened in response to the sustained high gold prices. Several Chinese banks have issued market risk warning notices for precious metal trading businesses, and some banks have also raised the starting amount of personal gold deposit businesses to remind customers that the recent domestic and international fluctuations in precious metal prices have intensified, and market risks have increased. Therefore, it is necessary to timely pay attention to position and margin balance changes, follow the laws of the financial market, and invest rationally.

At the same time, whether the factors that support the rise in gold prices have reversed is also worth investors paying attention to. The Federal Reserve's monetary policy significantly supposes the expectation of interest rate cuts further shrinks, disappears, or shifts back to interest rate hikes. In that case, it is highly likely to have a disruptive impact on the bullish market. In recent times, the negotiation process surrounding the Palestinian-Israeli conflict has been ongoing, with mixed and changing news. However, once both sides reach a ceasefire agreement, it will trigger a decline in market risk aversion[13]. As long as you pay more attention and understand the background, you will find that the market rules have traces to follow.

4.3. Adjusting Asset Reserve Structure

Faced with financial market fluctuations during periods of high gold prices, individuals and businesses can consider increasing their holdings of gold appropriately, which can provide a certain stabilizing effect during market fluctuations and reduce the overall risk of the investment portfolio. Alternatively, they can reduce risk by diversifying investments and allocating funds to different asset classes, such as stocks, bonds, real estate, etc.

There are many ways to invest in Internet gold wealth management, such as purchasing physical gold, gold ETF, gold futures and gold deposit business. Platforms including Ant Wealth, JD Finance, Tencent Wealth Management, etc. all have products related to gold investment[14]. When an asset performs poorly, other assets can compensate for losses, thereby reducing overall losses. These financial products provide a relatively low-risk way to participate in the gold market and profit from it. Adjusting asset allocation strategies in a timely manner is helpful to adapt to the constantly changing financial environment.

5. Conclusion

Against the backdrop of the continuous rise in gold prices, the recognition of gold investment value has increased, and market buying has increased, driving the development of the gold market. The rise in gold prices enables investors to gain higher returns, enhance confidence, and provide more trading opportunities. However, the rise in gold prices will significantly impact financial traders, and it is necessary to increase investment vigilance. Financial traders also need to comprehensively consider multiple factors when making decisions to avoid investment failure.

This study found that changes in supply and demand, monetary policy, geopolitical risks, and other factors are important factors in the fluctuation of gold prices. Macroeconomic factors and financial market fluctuations can also impact financial markets. Individual investors and businesses should closely monitor the changes in these factors to seize opportunities in the gold market promptly. The main research background applies to the changes in China's financial market. Due to different national conditions, the conclusions of this article are not sometimes applicable to other countries’ financial markets.

Against the backdrop of unstable international economic and political environments and frequent emergencies, the impact of rising international gold prices on financial markets involves multiple aspects. It is indeed difficult to take preventive and response measures in advance. Because of this, the international gold price has also attracted many scholars and investors to explore and discover its constantly changing patterns to find a relatively safe harbor in the constantly changing price market. How to better and comprehensively prevent the impact of changes in gold prices remains a worthwhile research topic in the future financial field.