Key takeaways

Gold prices start to reflect increased concern over the growing risks in geopolitics and financial markets.

• Gold prices sail into uncharted waters as a more dovish Federal Reserve prompts buying.
• Central bank interest in gold remains strong as some hedge against the weaponization of the US dollar.
• Chinese buyers bank on gold as other local investments underperform.
• Funds increase bullish bets…
• ...while ETF investors have not joined the party. 
• US interest rate cycle expected to set direction for gold prices, but other underlying trends expected to provide support.

Silver prices follow gold, but for now lack independent energy to push their own agenda, as can be seen by the Gold/Silver ratio languishing around 1:87.

• The price trend appears to have turned higher and there is room for the funds to get more active.

The Platinum Group Metals (PGMs) have seen some short-covering, but they have not seen follow-through buying yet.

• Platinum has a brighter outlook than palladium; neither PGM is blessed with strong fundamentals at present, but production cuts should help that.

Gold sails into uncharted waters as fresh all-time highs established

As March has unfolded gold prices have rallied at a fast pace, setting numerous all-time highs in the process - the latest being $2,224 per oz. This was above the previous all-time high of $2,148 per oz set in December 2023. As such, gold prices are now in uncharted waters (although you could argue that the 1980 high at $665 per oz, on an inflation-adjusted basis would be the equivalent of $2,460 per oz today. See Chart 1 of the full report available here).

 

Multiple bullish drivers

There have been multiple drivers behind the rally in gold prices; the one the market has reacted to most is any anticipated change in the Federal Reserves’ stance on interest rates. In line with this, the release in late-February and early-March of worse than expected US economic data on initial jobless claims and manufacturing, combined with an all-important drop in US inflation data, sparked the latest run-up in gold prices. The data provided ammunition for the Fed to turn more dovish, should it wish too. Indeed, this turned out to be the case as the Federal Open Market Committee (FOMC), at its meeting on March 20, signalled that three quarter-point cuts were still likely this year.

This was just what the market wanted to hear.

But what of the other drivers? 

While the recent rally has been largely Fed driven, the origins of the rally date back to October last year, when there was a surge in safe haven buying following Hamas’ attack on Israel on October 7. This abruptly ended the downward trend in gold prices that had seen prices fall to $1,810 per oz, from $2,065 per oz in May. The attack sparked fears that increased tension could lead to a regional war that could involve numerous oil producers and disrupt oil supplies.

Chinese investors favouring gold again 

China’s economy is weak, the property sector is in crisis, households have become cautious after the shock that Covid and long-lasting lockdowns inflicted, and many foreign investors have pulled funds out of the country as geopolitical tensions have increased. The Chinese yuan reflects the malaise in the economy, against the US dollar it has fallen to 7.2000; prior to Covid it tended to trade either side of 6.7000. Weakness in China’s property and stock markets, combined with restrictions on investing in cryptocurrencies, have encouraged investors to buy gold.

In 2023, China’s investment demand rose 28% and jewellery consumption climbed 10%, according to the World Gold Council.

The weaponizing of the US dollar

Since the end of World War II, the US dollar has dominated the global payments system with most foreign trade and international transactions conducted in dollars. This has led to the dollar acting as the world’s primary reserve currency. But over the past decade, or so, the US has taken advantage of its control over the international payment system to try to force its will on countries, companies and individuals who it has fallen out with it, by denying the perpetrators access to the US banking and clearing systems. The US has increasingly used this power against the likes of North Korea, Iran and Russia. Seeing this, more central banks (especially in emerging markets), have started to diversify away from holding most of their reserves in US dollars and relying on the US-run international payment system. 

Read the full report

03 Apr 2024 | Categories: Gold, Silver, China, US, Platinum, Palladium

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