Low rates, war, China: here’s why gold is updating its records

Low rates, war, China: here’s why gold is updating its records

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Gold doesn’t stop and continues to update records. On Tuesday it came close to 2,290 dollars an ounce, furthermore chased in its performance by silver which reached 26 dollars an ounce or the highest in two years. A rise in prices that made little difference to the contemporary appreciation of the dollar, which is usually a value that moves in the opposite direction to the price of the raw material.

Falling rates push bullion

Why this dynamic of such a marked appreciation for gold, which has gained 11% since the beginning of the year, updating its highs in a series? The latest news from the war front surrounding Gaza has fueled the demand – from investors – for an asset considered “safe” and valuable in the face of global geopolitical uncertaintieswhich as always the financial markets do not like.

To talk about this rally in a complete way, however, we need to take a step back and keep together a series of factors, which are gradually working together to support the bullion at unprecedented peaks.

In a recent analysis by Xs.com, we remember how the first factor to pull the gold prices is in fact the wait for cuts in the cost of money, in particular by the US Federal Reserve. In a scenario of falling rates, and therefore yields in general, an asset like gold – which by definition does not express a return – becomes more attractive for investors.

Geopolitical tensions

Yet gold has kept the engine revving high even in recent sessions, when – in the wake of yet another show of strength from the American economy – traders have scaled back their bets on the prospects of reducing the cost of money. Three cuts are still expected during 2024, but some are starting to suspect that in June the Fed may still remain wait-and-see and in any case it will not go beyond the 65 basis points of reduction in the cost of money budgeted for the entire year.

Hence the geopolitical tensions that have been fueled further for the direct involvement of Iran in the Middle Eastern chessboard, they gave new fuel to prices. The Israeli attack on the Iranian embassy in Syria has sparked fears that the conflict will spread, once again bringing uncertainty to the markets and therefore the desire for “safe haven assets” to protect against volatility and possible depreciation of the currency.

Short sales to be closed

It’s not all. According to Suki Cooper, an analyst at Standard Chartered who spoke to the Bloomberga typically financial phenomenon may have also occurred in the last few days: the need to cover short positions (i.e. bearish bets on the trend of gold) may have fueled the price run. In essence, those who have positioned themselves for a drop in prices are forced to close their bet (at a loss) when the drop does not materialize, fueling the rise despite themselves. According to the specialist, however, this is also a factor that heralds volatility for gold prices. Uncertainty also fueled by the fact that gold held by ETFs, financial instruments that purchase the underlying, has recently decreased.

The role of China and the bets of the investment banks

In support of the rising prices there is one last factor to consider that has influenced the last few months: activism on China’s bullion market. The Central Bank of Beijing has increased its gold reserves in each of the past 16 months, the financial agency calculates, and even young Chinese savers/investors have jumped into this market, considering the black season on the local stock market. Major investment banks root for gold: for JP Morgan it is the best commodity to bet on (it could reach 2,500 dollars, for the bank) and Goldman Sachs sees it at $3,200.

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