China is conducting thermal processing of gold and copper.

Gold Prices Meeting Big Tides

Gold prices are swimming against the current, skyrocketing by an impressive 20% within a span of two months, an unusual move for this asset class. What's causing this golden wave? Let's dive in.

"Gold's ascension can be attributed to a myriad of factors: the value of the U.S. dollar, its role as a hedge against inflation and currency devaluation, demand from central banks for reserve building, industrial companies, jewelers, and overall geopolitical tension," elucidates Ivan Avseyko, senior analyst at First Investment Company, to our experts.

Mid-April saw gold performing an about-turn, but many financial whizzes anticipated this regression to be shallow and short-lived. They were right on the money.

Mikhail Zeltzer, an expert at BCS Express, recently penned in his morning analysis: "The recent dip in gold, dropping beneath $2300, was perceived as an opportunity to accumulate with a medium-term target of historical highs. The optimism hinges on the weakness of the US Dollar Index (DXY) at 104.4 and expectations of an upcoming monetary policy reversal by the Federal Reserve. Gold and the US Dollar share an inverse relationship. Today, an ounce reaches absolute highs above $2430. $2500 isn't that far off and active traders might soon reap another quick and substantial profit."

Indeed, as per data from CME Group, investors now see a 50.7% likelihood of the first Fed rate cut in September, which has decreased from 48.6% a week ago.

The main catalyst for today's gold price surge is the news from last Friday that China offloaded a record-breaking amount of U.S. Treasury bonds in Q1 2024, estimated to be $53.3 billion by Bloomberg. China's assets are often guarded by Belgium, and they too sold another $22 billion worth of bonds.

The market speculates that the funds freed from selling U.S. bonds will (or have already been) used to buy gold. According to the latest reports, China's gold holdings in its reserves have increased from under 2% in 2015 to 4.9% and might continue to rise.

Key gold buyers apart from China are the central banks of India and Turkey. As per the World Gold Council, central banks globally purchased 290 tons of gold in Q1 2024, which marked a record-breaking Q1 performance.

The Deputy Managing Director of the IMF, Gita Gopinath, stated last week that some nations are reevaluating their dependence on the U.S. dollar in international operations and foreign exchange reserves. In this context, gold is viewed as a "politically neutral safe asset, ideal for storage at home and protection from sanctions or confiscation."

Central banks, particularly from emerging markets (EM), continue to increase their gold reserves, with the People's Bank of China being the largest buyer, steadily expanding its gold holdings for the past 16 months. Ivan Avseyko points out the advantage of gold as it's not subject to sanctions under such circumstances.

Stephen Chu, Asia's chief currency and rates strategist at Bloomberg Intelligence, opines that "China's sale of U.S. Treasuries may escalate as the U.S.-China trade war resumes."

Adam Button, head of currency strategy at Forexlive, believes that the recent meet between Russian President Vladimir Putin and China's president, Xi Jinping, contributed to the surge in gold prices. "If you're a gold bull, Putin's meeting with Xi Jinping is the best thing that could happen. They're trying to create a multipolar world, and you can't do that if you rely on the dollar," Adam Button contends.

The capsizing of the helicopter carrying Iranian President Ebrahim Raisi sparked gold trading activity at the market opening on Monday, as any political unrest tends to steer part of investment capital towards the reliable asset that is gold. However, the official explanation for the crash was attributed to poor weather conditions, indicating no further gold price impact.

Analysts are yet to predict how high gold prices could surge. "Forecasting whether gold will reach $2700 or even $3000 per ounce is futile. But understanding that the global trend for precious metals is upward is necessary. Should we anticipate a correction in the near future? Nobody knows, but rises of this magnitude generally occur without one," says investment banker and professor at the Higher School of Economics, Eugene Kogan.

Cu[rphy] prices are also on the rise, with a projected global shortage fueling the trend. "For years, investors, traders, and mining company executives have warned that a critical copper shortage is imminent due to increasing demand from industries adopting renewable energy - from electric vehicles to renewable energy infrastructure," suggests Profinance.ru.

Some countries' shift towards renewable energy sources and the rise in electric vehicle production are upping copper demand. On average, an electric vehicle holds 80 kg of copper. Renewable energy projects require 5-5.5 tons of copper per megawatt, with wind power plants needing 4 to 10 tons per megawatt.

Experts at Wood Mackenzie foresee that the demand for copper, along with aluminum and zinc, in "green" energy will double by 2040.

It seems the copper shortage might crop up earlier than predicted. "Reduced copper ore production due to limited supply has prompted talk of metal smelter reductions, and investors anticipate that increased usage of copper in rapidly growing sectors like electric vehicles, renewable energy, and artificial intelligence will compensate for declines in traditional sectors like construction," writes Bloomberg.

The recent copper price spike can be traced back to news originating in China. Chinese authorities announced the largest package of measures aimed at stabilizing the real estate sector on Friday, pledging to allocate up to 1 trillion yuan ($138 billion) to support the property market and offering funding for local governments to purchase unsold properties for affordable housing. Additionally, mortgage interest rates saw a reduction.

Considering China's industrial production surged by 6.7% year-on-year in April, prevailing above market forecasts, investors are becoming increasingly optimistic about China's economy and growing demand for raw materials, including copper.

The surge in gold and copper prices may also be a result of a phenomenon known as a "short squeeze" (a term derived from the English phrase "short-squeeze"). As prices approach all-time highs or strong technical resistance, short-sellers tend to sell futures contracts aggressively. If the price keeps rising, these speculators start to suffer losses, and at some point, they begin closing their losing positions by buying futures, further propelling the upward trend. Thus, the increase in prices can be attributed to the liquidation of short positions by speculators.

As with gold, it's fair to say analysts are hesitant when it comes to predicting the short-term price dynamics of copper.

The increased demand for gold from countries like China and India, as reported by the World Gold Council, contributes to the current trend of rising gold prices.
The USD-gold exchange rate is inversely related, implying that the weakness of the US Dollar Index (DXY) and expectations of a Federal Reserve monetary policy reversal could contribute to further gold price increases.
The unusual selling of U.S. Treasury bonds by China and Belgium, as seen in Q1 2024, could indicate an increasing dependence on precious metals like gold as a safe asset, driving up prices.
China's and Russia's geopolitical moves, such as the recent meeting between their presidents, and political unrest in various countries, may create a trend of investment capital moving towards precious and essential metals like gold and copper.