Gold analyst Sanjiv Arole delves into the intricate interplay of factors influencing the gold market, including interest rates, the US dollar, geopolitical tensions, and more.
In the thick of battle on the 15th day of the Mahabharata war, the news that Ashwathama had fallen (dead) spread like wildfire on the battlefield. As soon as the news reached Guru Dronacharya (commander-in-chief of the Kauravas and Ashwathama’s father), a shocked Dronacharya immediately sought out Dharamaraj Yudhisthir for he was known never to lie. On being asked to verify the news, Yudhisthir said, “अश्वत्थामा हतो नरो वा कुञ्जरो वा”! Roughly translated it means, Ashwathama dead (aloud), don’t know if man or elephant (barely audible). On hearing the first part clearly, Guru Dronacharya shed his weapons and sat for meditation and was promptly beheaded by his arch enemy’s son.
The US Fed chief, Jerome Powell, appears to be carrying Yudhisthir’s legacy forward. For, ever since the Fed last changed (raised) interest on 31st July 2023 and all anticipated a regime of rate cuts to begin, Jerome Powell has been ambiguous, indeterminate, indecisive, stubborn and unwilling to commit to any rate cut schedule. He has been steadfast in his stance on bringing down inflation to the target of 2%. So much so that even after it has become almost clear that rate cuts are imminent it remains to be seen if the Fed chief bites the bullet.
As most members appear to agree on rate cuts it could well happen in the next Fed meet in September itself. Powell could even make the official announcement at his annual Jackson Hole speech today (23rd August 2024). Or will he follow Dharmaraj Yudhister’s legacy and harp on more data on the US economy inflation course before giving the ultimate green signal. However, global markets from a weak dollar among other cues like rate cuts by other Western world central banks and the spectacular U-turn taken by the Japanese economy by ending the 8-year regime of negative interest rates and ushering an era of positive interest rates, saw tremendous volatility.
Commodity markets, particularly, gold and silver, led the way. Gold soared by over 2% to cross the $2,500 per ounce barrier and closed around $2,511-12 per ounce in New York on 16th August 2024, a then all-time high. The London pm close last Friday (16th August) was $2,485.80 per ounce, still a new high close in London. Not only that, gold scaled yet another new all-time of $2,532.20 per ounce (intra-day) on 20th August 2024. Since, then gold has vacillated between around $2,480 per ounce and $2,532 per ounce in the remainder of the week. It ended the week at $2,512 per ounce, London pm fix was at $2,511.20 per ounce.
Silver appeared to follow gold as it swung from one end to another while revolving around $29 per ounce. However, silver failed to cross the $30 per ounce mark, but at the same time did not slip below $29 per ounce as well. Silver’s London pm fix was $29.44 per ounce, it traded higher in New York to end the week at $29.83 per ounce. The platinum-group metals (PGMs) indulged in their own little dog-fights below the $1,000 per ounce mark. Both platinum and palladium are trying to stay relevant in the scheme of things and survive. Platinum and palladium closed the week in London at $948 per ounce and $942 per ounce, respectively. However, gold appears poised over the $2,500 per ounce mark ready to pounce on any opportunity provided by interest rate cuts geo-political tensions over escalation of the war over Ukraine or the Israel-Iran war.
So, is it all hunky-dory for the precious metals, gold in particular? Will gold continue its onward march past $2,500 per ounce on the path towards $3,000 per ounce and beyond? Is it a given that any cut in interest rates would automatically propel gold forward on a smooth highway without any potholes or roadblocks? There is a common belief that there is perfect correlation between the gold price and interest rates—with interest rates hikes normally resulting in a lower gold price and interest rates cuts causing a spike in the gold price.
However, history is somewhat different as a 50-year period shows just a 28% correlation between interest rates and the gold price. In the 1970s, the high gold price towards gold’s then peak in 1980 largely coincided with high interest rates. Then, during the 2008 financial crisis when the Fed lowered interest rates, the gold price actually fell when the rate cut was announced.
Likewise, a strong USD has at times gone hand-in-hand with higher gold prices. However, normally, particularly in recent times, the gold price has a negative correlation both with interest rates and the USD.
Then, in the run-up to the US-led invasion of Iraq in 1991 the gold price rose by tens of dollars to soar over $400 per ounce. But, when the war actually began on 17th January 1991, gold fell sharply by $10 per ounce. There is nothing like a given thing. Every situation is unique in itself. The gold price is not determined just by the USD or interest rates; several other factors contribute towards price determination. Geo-political tensions, the components of demand and supply, producer hedging, et al have a role to play in determining the gold price.
Elsewhere, a new Samsung solid state battery for electric vehicles could revolutionise the electric vehicle industry and become a game changer for silver. For, the use of silver as a key component, due to its exceptional electric conductivity and stability, combined with a technology breaking silver-carbon composite layer for anode would exemplify ground breaking advancement for batteries in electric vehicles. The makers project amazing benchmarks like 600 mile range, a 20-year life span and a 9-minute charge. A typical 100 kWh capacity battery with 200 cells would require1 kg of silver per electric vehicle. With global car production at 80 million vehicles per year, if 20% of these vehicles (16 million EVs) were to adopt Samsung’s solid state batteries then demand for silver could go through the roof at 16,000 tonnes (16 million EVs into1kg of silver). With global silver production around 25,000 tonnes, the impact of the technological change could be mind-blowing for silver’s demand-supply equation and for the silver price. Silver could easily dream about its target of $50 per ounce in the near future. The million-dollar question being: Is this commercially viable and if yes, then when?!
Meanwhile, a recent Supreme Court ruling allowing states to levy taxes on mining activities retrospectively from 1st April, 2005 has sent shock waves through the mining industry, in particular for gold, silver and diamonds. The retro tax has legal, financial as well as economic ramifications. While the retro tax could bolster states’ economic condition to some extent and provide it much needed freedom from the centre for financial assistance and bolster its revenue-gathering capabilities, it could impose have enormous financial burden on individual mining companies and even impact the country’s economy as it unleashing inflationary pressures on the economic front. Power costs could escalate and even construction and infrastructure could see cost overruns as companies would pass on their tax burden on to the end users. It is being said that overall impact of retro tax would be to the tune of Rs. 1.5-2 lakh crores, with public sector companies accounting for Rs. 70,000 to Rs. 80,000 crores.
As far as gold, silver and diamond companies are concerned their future is very bleak indeed. Most of the very few mining companies are either closed or closed to extinction. The mining policies over the last 30 years have failed miserably. Investments into this sector have dried up and all the foreign mining companies have left or sold off, diamond mining in particular. In gold, a private mining company is fighting against all odds to commence production later in the year. Will it be able to survive this blow? Only time will tell! Gold and diamond mining requires miracles to get out of the ICU alive. Are there any miracle doctors around? It is an SOS from the industry!!
Finally, Jerome Powell made a commitment about interest rate cuts at the annual Jackson Hole symposium on 23rd August, 2024. He reportedly said that it was time for a change in policy and to usher in a regime of rate cuts. However, as his wont he added a caveat to his commitment. He added that there was confidence about the inflation path towards the target of 2%. Then, he left the backdoor open by saying, “The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks.” He is said to have further stated that the Fed would balance a strong labour market with the 2% inflation target.
However, the bottom-line is that gold is in the right place at the right time poised above the $2,500 per ounce level to begin yet another bull run for the yellow metal with silver tagging along and ready to surge ahead towards its own all-time levels. Put on the seat belts for a ride into the stratosphere!