Key themes for this week:
- Expectations of lower interest rates are not the only reason for rising gold prices
- US GDP for the previous quarter revised upwards
- Oil prices taking cues from the Middle East
- EU CPI suggests another rate cut by the ECB
Gold’s recent rally has captivated the financial world, with prices soaring to unprecedented highs; gold prices have seen an impressive 31% increase over the past year. This surge is not merely a byproduct of the metal’s traditional safe-haven appeal in a declining interest rate environment; it’s driven by a potent combination of factors.
Historically, gold has always been seen as a refuge during times of economic uncertainty, particularly when interest rates are low. As central banks around the world pivot towards more accommodative monetary policies, the opportunity cost of holding non-yielding assets like gold decreases, making it more attractive to investors. This dynamic has been a significant driver of gold prices. However, this year’s rally tells a more complex story, with China at its centre.
China’s affinity for gold is deeply rooted in tradition, with peak buying seasons like the Lunar New Year often resulting in temporary spikes in domestic prices. Yet, 2024 has seen a departure from this pattern. Chinese buyers, including the People’s Bank of China (PBoC), have been snapping up gold at record levels, maintaining pricing at an elevated premium for nearly a year. This consistent demand has profoundly impacted global prices, pushing them higher, even as traditional Western investors have shown less enthusiasm.
One of the most striking developments in gold’s rally is the activity on the Shanghai Gold Exchange and the Shanghai Futures Exchange (SHFE). Chinese speculators have dramatically increased their positions, with long futures contracts on the SHFE soaring by almost 50% since late last year. This speculative frenzy has not only bolstered Chinese prices but has also exerted considerable influence on the global market, challenging the traditional dominance held by Western traders.
The PBoC has also been a significant player in the price of gold. Over the past year, the Chinese central bank has added a staggering 225 tonnes of gold to its reserves, the largest annual increase in its history. This accumulation aligns with China’s broader strategy of reducing its reliance on the United States (US) dollar and diversifying its reserves. The PBoC’s purchases have not only provided a solid floor for gold prices but have also sent a strong signal to the market, reinforcing the metal’s role as a critical asset in times of economic and geopolitical uncertainty.
China’s aggressive gold buying is not only a financial manoeuvre but also a hedge against the yuan’s devaluation. Moreover, the country’s economic uncertainty and geopolitical tensions with the US and other conflicts, like its fight with Taiwan, have amplified gold’s appeal.
As the US Federal Reserve (Fed) hints at potential rate cuts, which could depress Treasury yields in the US, gold’s allure has the potential to grow even further. Lower bond yields reduce the opportunity cost of holding gold, as it doesn’t pay interest, making it more attractive to a broad spectrum of investors. Western interest in gold-backed ETFs, which had waned in recent years, is also showing signs of a revival, further supporting prices.
The global economic landscape remains fraught with uncertainty. Geopolitical tensions, particularly in the Middle East and Asia, continue to stoke fears of widespread instability, driving demand for safe-haven assets. In this context, China’s role as a dominant force in the gold market will likely persist. The PBoC’s pause in gold purchases earlier this year was temporary, with new quotas issued to Chinese banks in August to regulate bullion flow, signalling continued strong demand.
While declining interest rates have certainly provided a favourable backdrop for gold, it is China that is the real engine behind the metal’s historic rally. The country’s massive and sustained purchases, both by the central bank and private speculators, have pushed prices to new heights but, perhaps more importantly, have also shifted the balance of power in the global gold market. As long as economic and geopolitical uncertainties persist and China continues to diversify away from the US dollar, the gold rally is unlikely to lose momentum anytime soon.
UP TO DATE WITH MARKET MOVEMENTS
Revised US GDP numbers lift US Treasury yields
This week, the bond market saw significant movements driven by economic data and expectations around US monetary policy. The yield on the 10-year US Treasury note rose above 3.87%, continuing its recovery from a recent dip. This uptick was fuelled by stronger-than-expected economic data, including a revised GDP growth rate of 3% for the second quarter, higher than both initial estimates and market expectations. Additionally, corporate profits rebounded, and initial jobless claims fell more than anticipated, giving the Fed more room to maintain a restrictive monetary policy even as markets anticipate rate cuts as early as September.
US major indices trade in the green
Equity markets displayed a mixed but generally positive trend this week. In the US, major indices saw gains, with the S&P 500 and Nasdaq rising by 0.4% and 0.7%, respectively, while the Dow Jones added 180 points. The upward movement was supported by revised GDP figures that alleviated some recession fears and a slight decrease in weekly jobless claims. Cloud-based software company, Salesforce, saw its shares surge over 3% after beating quarterly estimates and raising its full-year profit outlook. On the other hand, computer chip manufacturer, Nvidia’s shares declined by nearly 2%, though this was a smaller drop than the previous day’s losses.
The United Kingdom’s (UK’s) FTSE 100 Index reached a one-month high, buoyed by positive corporate news. Construction and material stocks led the gains, while the beverages sector lagged, with Diageo falling nearly 2% after going ex-dividend. The German DAX hit a new record high as it moved above 18,900, driven by expectations of a European Central Bank (ECB) rate cut in September, following lower-than-expected inflation data in Germany and Spain. Despite economic concerns, the DAX has surged by 13% year-to-date.
The Johannesburg Stock Exchange (JSE) experienced fluctuations around the 84,000-point mark, as traders awaited critical US economic data. Nvidia’s disappointing guidance on the future of artificial intelligence weighed on global investor sentiment, while locally, telecommunications company, Telkom, led gains with a 4% increase. Resource-linked stocks also performed well.
Oil edges higher as markets keep a close eye on tensions in the Middle East
In the commodities market, Brent crude oil futures edged higher to around $78.80/barrel after two consecutive days of declines. The rise was driven by concerns over tight supply, mainly due to Libya’s political instability and ongoing geopolitical tensions in the Middle East. However, these gains were tempered by worries about demand, as leading banks cut price forecasts amid economic challenges in key markets like China and the growing shift to electric vehicles.
Gold prices continued their ascent, rising above $2,510/ounce. The metal’s appeal is partly being assisted by expectations of Fed interest rate cuts. For further cues, market participants will closely watch upcoming US economic data, including today’s release of the PCE Price Index.
Dollar rebounds
The currency markets saw notable fluctuations, particularly with the US dollar and the euro. The US Dollar Index rose to 101.4, rebounding from a 13-month low, as resilient US economic data supported the greenback. The euro, however, weakened by more than 0.4%, falling below $1.108/€, as lower-than-expected inflation in Germany and Spain increased the likelihood of an ECB rate cut in September.
Meanwhile, the British pound traded around $1.32/£, maintaining its strength near a two-year high. The pound’s performance was supported by resilient UK economic data and expectations of a more cautious approach to rate cuts by the Bank of England, in contrast to the Fed’s anticipated rate reductions.
South Africa’s rand traded largely range-bound against the greenback, following the rally at the end of last week, while winning back some ground against the euro and sterling. The rand, however, battled to sustainably break below the R17.70/$ mark, with today’s US PCE data likely to act as a catalyst ahead of the Federal Open Market Committee meeting on 18 September. Markets largely anticipate that the South African Reserve Bank (SARB) will take its cues from the Fed and will likely cut rates in September. However, the SARB is expected to maintain its conservative approach.
Key Indicators:
USD/ZAR: 17.74
EUR/ZAR: 19.66
GBP/ZAR: 23.37
GOLD: $2,513.80
BRENT CRUDE: $79.07
Sources: Bloomberg, Reuters, Trading Economics, and Financial Times.
Written by: Citadel Advisory Partner and Citadel Global Director, Bianca Botes.