Gold prices have skyrocketed to record highs in 2024, baffling analysts who are struggling to pinpoint the exact cause of the surge. Traditionally seen as a haven investment, gold’s price surge contradicts recent economic data and central bank actions.
A Puzzling Rally
For months, gold prices hovered in a steady range. Then, in early March, they began a sharp upward climb, spiking 14% and shattering daily records. This surge defies easy explanation. Geopolitical tensions, a factor that typically drives gold prices higher, have remained elevated for months. Additionally, the Federal Reserve’s plans to cut interest rates, which would normally benefit gold, have become less certain in recent weeks.
The lack of a clear driver has perplexed industry insiders. They are scrutinizing global gold trading across futures markets, exchange-traded funds (ETFs), and the vast over-the-counter market. This complex and opaque system traditionally makes it difficult to pinpoint buying activity.
Who’s Buying Gold?
While some buyer groups are identifiable, their motivations remain unclear. Central banks, large institutions, and traders anticipating lower interest rates are likely participants. Additionally, Chinese consumers are seeking alternatives to low-performing assets and a weakening currency. However, the buying frenzy doesn’t seem to be driven by a single, dominant force. Analysts armed with better market data than ever before are still struggling to pinpoint the exact source of demand.
Interestingly, investors are not flocking to gold-backed ETFs, a common way to acquire gold. There have been steady outflows from these funds, suggesting a significant group is either staying on the sidelines or selling their holdings.
Analysts offer differing explanations for this phenomenon. Citigroup suggests long-term investors who bought gold years ago might be taking profits. The World Gold Council suggests the outflows from ETFs could be central banks quietly accumulating physical gold in the over-the-counter market.
When and Why is the Buying Happening?
Trading activity in futures and over-the-counter markets is surging, indicating involvement from institutional buyers like central banks, investment banks, and pension funds. Options activity is also picking up, with some expecting gold prices to climb even higher.
Interestingly, most buying seems to be concentrated on Mondays, Wednesdays, and Fridays. The gold market is sensitive to U.S. economic data releases these days, which can impact manufacturing, jobs, GDP, and inflation. This targeted buying suggests influential actors are strategically responding to economic data.
However, recent data has been positive, typically leading investors to believe the Fed will delay or reduce the size of interest rate cuts. This, in theory, would weaken gold’s appeal compared to interest-bearing assets like bonds. Additionally, the strengthening dollar makes gold more expensive for major consumers like China and India.
The Million-Dollar Question: Why Now?
The core mystery remains: why the sudden surge in gold buying now? While the Fed is still expected to cut rates this year, benefiting gold, many investors are less convinced about the timing compared to a few months ago.
One explanation could be that some investors fear a potential recession based on recent data, prompting them to seek the haven qualities of gold. This theory aligns with another curious trend: the recent disconnect between a key gold price spread and U.S. interest rates.
Normally, this spread tracks interest rates due to gold storage, financing, and insurance costs. However, in recent weeks, the spread has dipped below Fed rates as spot prices soared. Historically, this inversion only happens when interest rates are low or about to fall sharply.
This spread inversion could signal that nervous investors are scrambling to buy gold now as a hedge against potential economic turmoil.
“The rally is defying traditional logic, especially considering still-elevated interest rates,” said Ole Hansen, head of commodity strategy at Saxo Bank. “The narrative seems to be shifting towards persistent inflation, a possible recession, heightened geopolitical uncertainty, and de-globalization driving central bank demand for gold.”
Source: Mining.com
