Given the turbulent geopolitical climate and the gloomy outlook for the worldwide economy, the rapid rise in gold prices to all-time highs seems easy to elucidate from a distance. The precious metal is thought to be a safe-haven asset, and the final view is that gold prices should rise when rates of interest fall – which many investors expect later this yr.
And yet. Look closer and it’s miles from clear: why is gold suddenly rising? in the intervening time?
After trading in a reasonably stable range for months, gold prices began to rise in early March. It has since risen 14%, abandoning a series of each day records. But geopolitical tensions have been high for months and even years, and the outlook for when the Federal Reserve will cut rates of interest has dimmed in recent weeks. So what has modified?
Seasoned executives and analysts offer very different answers to the query of who or what drove gold to its unprecedented heights: Is it a central bank nervous concerning the dollar’s role as an economic weapon? Are funds betting that the Federal Reserve’s pivot to lower rates of interest is imminent? An army of algorithmic traders drawn to gold just because it’s rising? Stubborn inflation and fear of a tough landing? Weakening currencies? Upcoming elections? All of the above?
The mystery has led industry insiders to comb through the structures of an enormous global trade that stretches across futures and exchange-traded funds from New York to Shanghai to a large over-the-counter hub in London and a globe-spanning network of traders, sell the bars. Coins and jewellery for everybody, in every single place.
It is an opaque and sophisticated world that has been difficult to interrupt through previously. Still, the market and regulators have for years sought to extend transparency and improve access to data that can help shed some light on the gravity-defying rally in one in every of the world’s oldest stores of wealth.
Who buys?
First the straightforward answer: central banks particularly, but additionally large institutions and traders are preparing for a shift to looser rates of interest. Chinese Consumers are concerned about declining returns from other assets and a depreciating currency. Reddit Inc.’s platform itself says: “Stacker“ Brag about hoarding bars and coins.
But these groups have been a consistently bullish force for months – or within the case of central banks, even years – and it is not clear why any of them are buying with a much greater sense of fear, greed or exuberance. Analysts have higher market data than ever before, and yet the general answer is frustratingly vague: It’s about everyone without delay and nobody particularly.
What are they buying?
One thing is obvious and in addition a headache: investors haven’t purchased exchange-traded funds, one in every of the simplest ways to accumulate gold. A gentle stream of outflows from gold-backed ETFs suggests a big cohort is missing out – or cashing out.
“This is one of the more bizarre phenomena I have ever seen in the ETF space,” said Nate Geraci, president of the ETF Store. “What is particularly interesting is that gold demand has also been very strong in other channels such as central bank purchases and direct purchases by retail and retail investors.”
Citigroup Inc. explains why net ETF inflows have been particularly weak, reflecting profit-taking by long-term investors years ago. The incontrovertible fact that the regular and sizable outflows haven’t had a serious impact on prices also suggests strong demand for the bars they sell – and central banks can be a natural buyer, in accordance with Joe Cavatoni, who runs World Gold ETF- Council platform.
“There are other investors buying the physical gold, so it has no impact,” he said in an interview. “Guess where it’s going: into the OTC market, which is being picked up by central banks.”
Where do they buy?
Trading activity is surging within the larger futures and over-the-counter markets, suggesting that the same old institutional buyers – central banks, investment banks, pension funds, sovereign wealth funds – are involved. Options activity can be increasing and there’s expectation that gold prices could rise even further as options traders rush to cover their risk.
The variety of outstanding contracts in New York futures rose, an indication that longer-term bets from asset managers are on the rise. But total trading volume has exceeded the variety of open contracts – suggesting an increase within the form of frenetic day trading that algorithmic funds excel at.
When do they buy?
Mainly Mondays, Wednesdays and Fridays. The gold market is notoriously sensitive to changes in US economic data, much more so since prices rose in early March. Key economic releases lately provide clues to the strength of producing, jobs, GDP and inflation, and a concentrated purchasing surge seen after the information provides a powerful clue to the identity of probably the most influential players.
But that alone has confused analysts because recent data has been hot and investors in currency and bond markets have responded with bets that the Fed’s policy shift will come later and be flatter than expected a number of months ago.
In theory, this is able to be negative for gold, as high rates of interest reduce the attractiveness of gold bars in comparison with high-yield assets like bonds. Investors are also pushing up the dollar, which has made gold significantly costlier for buyers in key consumer markets China and India.
Why are you purchasing now?
That’s the large query. The glaring gap within the narrative during the last five weeks is that while the Fed still expects to start cutting rates this yr – which should profit gold – many investors are literally less convinced concerning the timing than a number of months ago.
One possibility is that some gold investors are as an alternative betting on the prospect of a tough landing for the U.S. economy based on recent data and are rushing to purchase bullion since it serves as a haven.
This idea could also provide a proof for an additional strange move within the gold market in recent weeks – the connection between a closely watched gold price range and Federal Reserve rates of interest.
The percentage yield between London spot and three-month futures – which tends to trace rates of interest due to costs of storing, financing and insuring gold – has rarely dipped below Fed rates in recent weeks as spot prices have soared. Historically, this only happens consistently when rates of interest are either low or about to drop significantly.
The spread reversal could indicate that nervous investors at the moment are wanting to purchase spot gold to guard themselves from possible turbulence.
“The rally goes against a lot of normal thinking, especially when it comes to still-elevated interest rates,” said Ole Hansen, head of commodities strategy at Saxo Bank AS. “I think the narrative is changing towards stubborn inflation and perhaps a hard landing, seasoned with a lot of geopolitical uncertainty and deglobalization driving central bank demand.”
