China is thermally processing gold and copper.
Gold Prices: An Unprecedented Surge
In a surprising turn of events, the price of gold saw a staggering 20% increase from February to April, a rare occurrence in the gold market. Here's the lowdown on what's driving thisgold frenzy.
"Gold's price trajectory is steered by several factors," says Ivan Avseyko, senior analyst at First UC. "These include the value of the US dollar, gold as a hedge against inflation and currency devaluation, demand from central banks and industrial companies, jewellers, and overall geopolitical tension."
When gold started to correct in mid-April, many financiers expected a shallow, transient dip. True to their predictions, gold bounced back just as swiftly. Mikhail Zeltzer, an expert at BCS Express, says, "Today, an ounce has surpassed the absolute highs above $2430, edging closer to $2500. Active traders may soon lock in yet another quick and substantial profit."
The CME Group recently reported that investors now see a 50.7% chance of the first Fed rate cut by 25 basis points in September, up from 48.6% a week ago, which fuels optimism in gold's growth.
The primary catalyst for gold's rally is news from last Friday about China's record sale of U.S. Treasury bonds in the first quarter of 2024. Beijing offloaded $53.3 billion worth of U.S. paper, with Belgium adding another $22 billion to that total. The market assumes these funds have (or will) be used to purchase gold, as China's gold reserves in its reserves have increased from less than 2% in 2015 to 4.9% and could potentially rise further.
Central banks, predominantly from emerging markets, have been increasingly stockpiling gold, with the People's Bank of China being the biggest buyer. Buyers like the central banks of India and Turkey have also contributed to worldwide gold demand. As noted by the World Gold Council, central banks worldwide bought 290 tons of gold in the first quarter of 2024, marking the strongest Q1 gold purchase in history.
Gita Gopinath, Deputy Managing Director of the IMF, stated last week that some countries are assessing their dependence on the U.S. dollar in international operations and foreign exchange reserves. Gopinath believes gold is "a politically neutral safe asset that can be stored at home and protected from sanctions or confiscation."
Ivan Avseyko remarks, "Central banks, especially from emerging markets, continue to amplify their gold reserves. The largest buyer of gold is the People's Bank of China, which has consistently hoarded gold for the past 16 months and exhibits no signs of slowing down."
Steven Chu, Bloomberg Intelligence's Asia Currency and Rates Strategist, suspects that "China's sale of U.S. Treasury securities could intensify as the U.S.-China trade war resumes."
Adam Button, Head of ForexLive's Currency Strategy, believes that the visit of Russian President Vladimir Putin to China last week played a part in the rise in gold. "If you're a gold 'bull', the meeting between Xi Jinping and Putin 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," says Button.
The death of Iranian President Ebrahim Raisi on Monday incited investors to actively buy gold contracts, as political risks frequently cause capital shifts into gold, which is considered the most dependable asset. However, the official cause of the helicopter crash in which the Iranian president was traveling was attributed to "bad weather conditions," leaving gold prices unchanged.
Gold analysts remain hesitant to predict whether gold will reach levels of $2,700 or even $3,000 per troy ounce, but they agree that the current global trend for precious metals is upwards. A correction in the near future is uncertain, but an upturn rarely happens without one, as Eugene Kogan, investment banker and professor at the Higher School of Economics, notes, "Guessing whether gold will reach levels of $2,700 or even $3,000 per troy ounce is foolish. As is assuming that silver will be at $35-40 this year. But understanding that the global trend for precious metals is currently upwards is necessary."
Meanwhile in the copper market, prices are on the rise with the main factor being the forecasted global shortage of this metal. "Investors, traders, and executives of mining companies have been warning for years that the world will face a critical copper shortage due to increasing demands from sectors of the energy transition – from electric vehicles to renewable energy infrastructure," according to portal Profinance.ru.
Indeed, some countries' shifts toward renewable energy sources and the increase in electric vehicle production have boosted copper demand. On average, an electric vehicle contains 80 kg of copper, while each megawatt of solar energy requires 5-5.5 tons of copper. Wind power plants need 4 to 10 tons of copper per megawatt.
By 2040, the demand for copper, as well as aluminum and zinc, in "green" energy could double, according to Wood Mackenzie. It seems that a copper shortage may occur earlier than anticipated, prompting speculation about cuts in metal production and increased copper ore usage in fast-growing sectors like electric vehicles, renewables, and artificial intelligence.
The surge in copper and gold prices could also be a result of a "short squeeze," a phenomenon where aggressive bearish bets on futures contracts lead to an upward trend when prices continue to rise, forcing speculators to incur losses and close out their losing positions. As with gold, analysts are hesitant to predict the short-term price dynamics of copper, as the market continues to be influenced by economic uncertainty, inflation expectations, geopolitical tensions, and central bank activity.
- The CME Group's report indicates a growing dependence on the US dollar's value, as it suggests a higher likelihood of the first Fed rate cut by 25 basis points in September, which could further fuel gold's growth and inflation.
- Central banks, such as China's People's Bank, have been increasingly purchasing gold as a hedge against potential currency devaluation, contributing to the current average price increase of gold approaching $2500 per ounce.
- The surge in gold and copper prices may be due to a 'short squeeze', where aggressive bearish bets on futures contracts lead to an upward trend, causing speculators to close out losing positions quickly, creating a dependence on the market's volatility for profit.
