Gold prices and their sudden rise in the recent period have raised some questions, although the prevailing opinion may go to an answer related to the divided geopolitical climate and ambiguous expectations for the global economy. The precious metal is seen as a “safe haven”, and the general view is that bullion prices should rise when interest rates fall – which many investors expect will happen later this year. But why is gold suddenly rising now?
After trading in a fairly flat range for several months, bullion began rising in early March, by 14%, leaving a string of daily highs. But geopolitical tensions have been high for months, even years, and if anything, expectations about the timing of Fed rate cuts have become murkier in recent weeks. So what has changed?
Bloomberg News reviewed the answers from executives and seasoned analysts, and they seemed very different about who or what drove gold to unprecedented heights: Is it central bank purchases and concern about the dollar’s role as an economic weapon? Are funds betting that the Fed’s shift towards lower interest rates is imminent? An army of algorithmic traders attracted to gold simply because it is rising? Stubborn inflation and fears about a hard landing? Weakening currencies? Next elections? All of the above?
Who buys?
Central banks, in particular, are the most prominent buyers of gold recently, as well as major institutions and traders who are preparing to shift to more flexible interest rates. Chinese consumers are concerned about fading returns in other assets and a falling currency.
But these groups have been a consistent bullish force for months — or years in the case of central banks — and it is not clear why any of them would buy with a much greater sense of fear, greed, or exuberance.
What do they buy?
One thing is also clear and surprising: investors haven’t been buying exchange-traded funds, one of the easiest ways to acquire gold. The steady stream of outflows from gold-backed ETFs suggests that a large group is missing out on — or withdrawing — their money.
“This is one of the most bizarre phenomena I’ve ever seen in the ETF space,” said Nate Geraci, president of ETF Shop. “What is particularly interesting is that demand for gold has been very strong in other channels such as central bank purchases and direct purchases by individual investors and the private sector.”
Profit taking by long-term investors who have been buying for years is how Citigroup explains why net ETF flows have been noticeably weak. The fact that steady and large outflows did not have a greater impact on prices suggests strong demand for the bullion they were selling and that central banks would be natural buyers, according to Joe Cavatoni, who oversees the ETF platform report at the World Gold Council.
Where do they buy?
In the larger futures and over-the-counter markets, trading activity is rising sharply, suggesting that the usual institutional buyers – central banks, investment banks, pension funds and sovereign wealth funds – are all participating. Options activity is also witnessing a revival, and there are expectations that bullion prices may rise further as options traders rush to cover their exposures.
The number of outstanding contracts in New York futures is rising, which is an indication that long-term bets by money managers are on the rise. But total trading volume exceeded the number of open contracts – indicating an increase in the type of frenetic algorithmic trading funds excel at.
When do they buy?
Mainly on Mondays, Wednesdays and Fridays. The gold market is known to be sensitive to shifts in US economic data, and this has become even more true since prices rose at the beginning of March. The major economic releases of those days provide readouts on the strength of manufacturing, jobs, GDP and inflation, and a concentrated surge in post-data buying provides strong evidence of the identities of the most influential actors.
But that in itself has confused analysts, because the latest data has been hot, and investors in currency and bond markets have been responding by betting that the Fed’s pivot will come later and be less deep than expected a few months ago.
In theory, this would be negative for gold because higher interest rates reduce the attractiveness of bullion compared to yielding assets such as bonds. Investors are also pushing up the value of the dollar, which has made gold much more expensive for buyers in the largest consumer markets: China and India.
Why buy now?
This is the big question. The glaring hole in the narrative over the past five weeks is that while the Fed is still expected to start cutting interest rates this year — which would benefit gold — many investors are actually less convinced about the timing than they were. A few months ago.
One possibility is that some gold investors are instead focusing on the potential for a sharp downturn in the US economy based on recent data, and are rushing to buy bullion for its safe-haven role.
This idea could also provide an explanation for another strange movement in the gold market in recent weeks – the relationship between the closely watched gold price spread and the interest rates imposed by the US Federal Reserve.
The percentage yield between the London spot rate and three-month futures contracts – which tend to track interest rates due to the cost of storing, financing and insuring gold – has made a rare dip lower than the Fed rate in recent weeks, with spot rates rising. Historically, this only happens on a sustained basis when interest rates are low or about to move sharply lower.
A spread reversal may indicate that nervous investors are clamoring for spot gold now, as a protection against potential turmoil.
“The rally challenges a lot of normal thinking, especially when it comes to interest rates, which are still high,” said Ole Hansen, head of commodity strategy at Saxo Bank AS. “I think the narrative is changing towards flat inflation and perhaps a sharp decline, spiced with a lot of geopolitical uncertainty and deglobalization driving central bank demand.”
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