(Bloomberg) — From afar, it’s easy to explain why gold prices are soaring toward all-time highs, given the difficult geopolitical climate and global economic uncertainty. It may seem like that. Precious metals are famously seen as a 'safe haven' and the general view is that bullion prices should rise as interest rates fall, with many investors expecting that to happen later this year. I predict that it will happen.
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And yet. If you look closely, it's not obvious. Why is gold suddenly rising now?
After trading in a fairly stable range for several months, bullion prices began to soar in early March. It has since risen 14%, setting daily records one after the other. But geopolitical tensions have been rising in recent months and even years, and if anything, the outlook for when the Fed will cut interest rates has become uncertain in recent weeks. So what has changed?
Read: Chinese purchases set stage for gold's latest record
Seasoned executives and analysts have vastly different answers as to who or what drove gold to unprecedented heights. Are central banks concerned about the dollar's role as an economic weapon? Is the fund betting that the Fed's shift to lower interest rates is imminent? Will armies of algorithmic traders be attracted to gold just because it is going up? Are you worried about stubborn inflation and a hard landing? Currency devaluation? Elections coming soon? All of the above?
The mystery has led industry players to pierce the vast conduit of global trading, spanning futures and exchange-traded funds from New York to Shanghai, to a huge over-the-counter trading hub in London and a network of bar-selling dealers around the world. Infiltrated. Share your coins and jewelry with anyone, anywhere.
This is an opaque and complex world that has historically been difficult to navigate. Still, markets and regulators have been working for years to increase transparency and access to data that could help shed a little more light on the gravity-defying rally in one of the world's oldest repositories of wealth. It is increasing.
Who will buy it?
First, the answer is simple. Central banks in particular, as well as major institutions and traders, are preparing for a move to easing interest rates. Chinese consumers are concerned about lower returns on other assets and a weaker currency. Reddit Inc.'s platform boasts of self-proclaimed “stackers” hoarding bars and coins.
But these groups have been consistently bullish forces for months, or in the case of central banks, years, and why any of them are buying with a greater sense of fear, greed, or enthusiasm. It is not clear whether Analysts have better market data than ever before, but the cumulative answers are frustratingly vague. It happens to everyone all at once, not to any one person in particular.
what are they buying?
One thing that's clear is that it's also a headache. That said, investors aren't buying exchange-traded funds, which is one of the easiest ways to acquire gold. Steady outflows from gold-backed ETFs suggest that key players are missing out or cashing out.
“This is one of the strangest phenomena I've ever seen in the ETF industry,” said Nate Geraci, president of ETF Store. “What is particularly interesting is that demand for gold is also very strong through other channels, including central bank purchases and direct purchases by individuals and retail investors.”
Citigroup blames the ETF's significantly weaker net inflows on profit taking by long-term investors who bought it years ago. Joe Cavatoni, who oversees World Gold, said the fact that the steady, large outflows haven't had a big impact on prices suggests strong demand for the bullion they're selling, and central bank would be the obvious buyer. Council's ETF platform.
“There are other investors who are buying physical gold, so it hasn't affected us in any way,” he said in an interview. “Let's think about where it's going to go. OTC markets, picked up by central banks.”
where are they buying?
Trading activity has increased sharply in larger futures and over-the-counter markets, indicating the involvement of the usual institutional investors such as central banks, investment banks, pension funds and sovereign wealth funds. Options trading has also picked up, with some expecting bullion prices to rise further as options dealers rush to cover their exposures.
The number of outstanding New York futures contracts is increasing, indicating an increasing trend in long-term investment by asset managers. However, overall trading volume exceeded the number of open contracts, suggesting a surge in the frenzied day trading that algorithmic funds excel at.
when do they buy?
It is mainly held on Mondays, Wednesdays and Fridays. The gold market is notoriously sensitive to changes in U.S. economic indicators, and this has become even more so since the price rally in early March. Major economic releases at the time showed strength in manufacturing, employment, GDP, and inflation, and this data provided powerful clues as to the identity of the most influential actors. Buying momentum can be seen.
But that in itself is perplexing analysts. That's because recent data has been hotly released, and investors in the currency and bond markets are reacting with bets that the Fed's policy shift will be slower and shallower than expected months ago. .
In theory, this is negative for gold, as high interest rates make bullion less attractive compared to higher-yielding assets such as bonds. Investors are also pushing the dollar higher, making gold much more expensive for buyers in China and India, the top consumer markets.
Why would they buy now?
That's the big question. The glaring hole in the story over the past five weeks is that the Fed is still expected to start cutting rates this year, which should be positive for gold, but in reality many investors are wondering more about the timing of the cut than they were months ago. It's a lack of confidence.
One possibility is that some gold investors are focusing on the prospect of a hard landing for the US economy based on recent data and rushing to buy gold bullion for its role as a haven. is.
This idea may also explain another interesting move in the gold market in recent weeks: the closely watched relationship between gold price spreads and US Federal Reserve interest rates.
London spot and three-month futures yields, which tend to be tied to interest rates because of the costs of storing, financing and insuring gold, have been unusually below the Fed rate in recent weeks as spot prices soared. . Historically, this only occurs sustainably when interest rates are low or when they are about to fall rapidly.
The spread reversal could indicate that nervous investors are rushing to snap up spot gold now to protect themselves from potential disruptions.
“This rise is a big departure from conventional thinking, especially with interest rates remaining high,” said Ole Hansen, head of commodity strategy at Saxo Bank AS. “Add in a lot of geopolitical uncertainty and deglobalization driving demand for central banks, and I think the story is shifting towards a sticky and possibly hard landing for inflation.”
–With assistance from Eddie Spence and Sybilla Gross.
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