Bullion analyst SANJIV AROLE believes that given the world’s apparent volatility in various regions, any escalation in tension is likely to drive gold to new peaks.
A business enterprise is said to be on course when it attains its break-even point. For a spacecraft to soar into outer space it needs to reach a minimum velocity called ‘Escape velocity’ to break through the gravitational pull of the earth.
In a totally different scenario, gold seemed to have its own break-out moment on April 13th when it spectacularly smashed through to over $2,448 per ounce intra-day, an all-time high, after Iran rained missiles and drones on Israel. Silver, too, followed gold in its slipstream and went to within a whisker of the $30 per ounce level at $29.90 per ounce (intra-day). Not only that, but gold also withstood the pressures of the sliding USD Index, the Dow and even crude oil prices. Apart from all the above, gold ignored the bogey of inflation raised by its nemesis in recent times – Jerome Powell. The Fed chief even warned that US interest rate cuts during the year could only be just one rate instead of the expected three, due to the inflation scare. So, has gold exorcised itself from the Jerome Powell syndrome?
Although, the sudden de-escalation of the Iran-Israel conflict caught gold and the rest of the precious metals’ basket off-guard, gold fell to below $2,300 per ounce briefly and silver, too, slipped beneath $27 per ounce for a while. But there seems to be enough gas in the tank for the current gold’s bull run to continue unabated. However, before jumping to any conclusions, let us look at in detail as to what bolsters the gold price, and can the runaway gold bandwagon be slowed down or hampered?
Gold’s Trajectory
Gold began at $2,054.05 per ounce on 3rd January. It first declined by around 3.47% in mid-February to $1,985.10 per ounce, the only time during 2024 that gold fell below $2,000 per ounce. Then, as Iran rained missiles and drones on Israel, gold climbed a fresh all-time of $2,448 per ounce around 12th -13th April 2024. It finally ended on 25th April at $2,343.10 per ounce, up by around 14% from the beginning of 2024. The very high gold price saw subdued demand for gold, particularly in March 2024.
Imports fell to just around 10-12 tonnes from over 100 tonnes in February. Escalation in the Iran-Israel conflict that saw gold flare up to $2,448 per ounce resulted in a rather slow IIJS Tritya show in the first week of April. Silver also opened 2024 at $23.28 per ounce only to decline by 5.39% to $22.09 per ounce on 14th February 2024. Thereafter, it followed gold to surge forward to $29.90 per ounce (intra-day) on 12th April, up by 28.44% from the January opening price for 2024. It closed on 25th April at $27.36 per ounce, still up by 17.52% over January level (all prices London fix (am/pm).
Factors Influencing Metal Pricing
Now, let us have a detailed look at factors affecting gold and silver prices, in particular.
US interest rates: The last US interest rate hike of 0.25% was made in July, 2023. Since then, US interest rates are at a 23-year high of 5.25%-5.5% as the US Fed maintained the rates in the April meet as well. When it became evident that there would be no fresh rate hikes, gold took off in the last few months of 2023. Further, geopolitical tensions and the expectations of rate cuts in 2024 saw gold scale all-time high levels over $2,400 per ounce in the current month of April. Now, the suspense is, how many rate cuts will the US Fed make in 2024, one, two or three? Upon that hinges how far gold will go!
Central Bank purchases of gold: In the last two years, Central Banks (CBs) have bought over a 1,000 tonnes per annum. In 2022, CBs purchased 1,136 tonnes of gold, while in 2023 it was around 1,036 tonnes.
In fact, it is said that China bought over 300 tonnes since 2022 till date, while India added over 200 tonnes from 2017 onwards, adding over 18.5 tonnes in 2024 so far with an overall aggregate of 822.10 tonnes.
In the current year, too, gold buying by CBs has continued with over 45 tonnes in January and a further 20-25 tonnes in February. Even as the gold price continued to scale record highs, CBs have been the corner stone of gold demand in 2024.
Gold ETFs: Globally, gold ETFs had a tenth consecutive month of outflows bringing the holdings down to around 3,125 tonnes. This is against an all-time peak of 3,915 tonnes in October 2020. However, on the other hand, Indian gold inflows continued even in 2024. In 2023, it aggregated over Rs.52 billion up from around Rs.6.5 billion, but well below Rs.69.2 billion in 2020-21. With the gold price scaling highs, one expects inflows to turn the corner soon in global markets as well.
Recession threat: The US GDP grew by 5.2% in the third quarter of 2023, but the latest Fed projections suggest that the growth will slow to just 1.4% for the full year of 2024. Moreover, the 10-year and 2-year US treasury yield curve has been inverted since mid-2022, a historically strong recession indicator. Any economic downturn is likely to be positive for gold to some extent.
State of US & global economy: US inflation is at 3.48% as compared to 4.98% a year ago. Still, it is much below the Fed target of 2% to be attained before rate cuts can become automatic. The Fed decision on rate cuts would depend on which way inflation goes. Otherwise, every economic data coming out of the US could cause the gold price to move sideways in a range. On the global front, growth is expected to remain at 3.1% in 2024.
Geopolitical pressures: There is no dearth of global hot spots around the world. Gold got a tremendous boost after the advent of the Ukraine war that saw the gold price soar past $2,000 per ounce levels over two years ago.
Then, in October 2023, the Israel-Hamas conflict saw gold gate crash through to around the $2,100 per ounce mark in December 2023.
More recently, the flare up between Israel and Iran saw gold scale an all-time high of over $2,448 per ounce intra-day around 13th April, 2024. Even as the gold price has its ebbs and flows it still has remained above $2,300 per ounce in spite of no immediate threat of a flare up between Iran and Israel. The world on the whole seems to be sitting on a powder keg at different locations. Any escalation in tension is bound to bolster gold to fresh highs. With spending on arms increasing every year and with several big economies thriving on exports of arms and ammunitions this scenario is not likely to disappear anytime soon.
Chinese demand for gold: Even as gold crossed the $2,400 per ounce mark there are many who believe that geopolitical tensions and interest rate cuts apart, Chinese demand for gold is one of the major reasons for the yellow metal to sustain itself at such high levels. Sustained Chinese demand on all fronts is one of the key fundamental drivers of the gold price. For, the world’s largest consumer of gold is aided by retail shoppers, fund investors, commodity traders as well as speculators and the Chinese central bank, too, looks at gold as safe haven – store of value in the current turbulent times. Moreover, the poor state of the Chinese real estate sector as well as the choppy equity markets has seen all investments head for gold. So much so, that Chinese gold demand last year for jewellery increased by 10% even when Indian demand fell by 6%. Then, demand for bars and coins in China surged b around 28%, according to HK based Precious Metals Insights Ltd. Imports of gold into China aggregated 2,800 tonnes over the last couple of years. Not only that, China is also said to be selling US treasuries and buying gold. It put pressure on the US dollar against most currencies while aiding gold at the same time. As long as China calls the shots, gold is on a belter of a wicket.
US debt servicing: In February 2024, US debt grew to $34.4 trillion, up by $1 trillion in both the two separate 100-day periods since June 2023. The cost of servicing this debt on an annualized basis was $726 billion, which accounts for 14% of total US government spending. A substantial portion of this debt is owned by foreign entities (including governments). China holds around $797 billion of US treasuries and recently off-loaded a substantial portion of its holding to shore up its gold reserves. It could have an impact on US bond yields as well as weaken the US dollar. Now, the US dollar index is around 105 levels. It was between 99.8 and 107 range over a 52-week period. The all-time high and low levels were around 164 and 70-71 levels, respectively. Any decline in the US dollar index would be only beneficial for the gold price.
Elections: The year 2024 is an election year, in particular for the two largest democracies in the world – the USA and India. An election entails huge costs in both the countries. Despite various checks and balances there is usage of unaccounted funds, particularly in India. Above average liquidity in the system could lead both to selling of gold and silver to fund the spending by candidates as well as stocking excess cash/funds in the form of precious metals or even diamonds. Funds could exchange hands in a big way and even give a boost to the respective economies.
Meanwhile, India’s Gems & Jewellery exports made for some interesting reading. Overall gross gems & jewellery for 2023-24 (April-March) fell by 14.45% to $32.29 billion. Gross gold jeweller exports grew by 16.75% to $11.23 billion. While gross silver jewellery exports declined by 44.97% to $1.62 billion, platinum jewellery exports surged by 449% to S163.48 million. However, plain gold jewellery exports grew by almost 62% to $6.79 billion, with UAE surging ahead by 107.2% to reach $4.53 billion. Apparently, the UAE-CEPA was the cause for the spectacular show. But, the World Gold Council report for 2023 shows that gold jewellery demand in the UAE actually fell by 15% during the calendar year 2023. Something to ponder upon!
Finally, it seems to be a two-horse race between gold and silver on the price front. Gold has done all the heavy lifting and even scaled a much vaunted $2,448 per ounce earlier this month. However, the silver price is up by over 17.5% to $27.36 per ounce from the beginning of the year as of 25th April, gold’s rise despite the razzmatazz has increased by around 14% to $2,343.10 per ounce over the same period. In spite of that gold seems to be the front runner to scale $2,500-3,000 per ounce in the foreseeable future (gold bugs are asking for the moon). However, silver seems ready to overtake in its slipstream. But, the threat of a recession in the US could haunt silver. Gold appears to have no such worries. Come on gold! “Allez, allez, allez!”