Bullion analyst Sanjiv Arole explores the factors that are reshaping the global markets and their impact on gold. The Israel-Hamas and Russia-Ukraine wars, the potential for recession, Central Bank purchases, and the role of Gold ETFs are among the variables influencing gold’s journey.
Dussehra not only heralds the triumph of good over evil but, it is also the one of the most auspicious days in the Hindu calendar, wherein warrior kings embarked upon their campaigns by crossing their own boundaries to conquer new territories. For gold, though, Dussehra came a few weeks earlier, on 7th October to be precise. The Hamas attack, deep inside Israeli territory, killing innocent civilians, sparked off a war on the Hamas by Israeli troops vowing to annihilate the Hamas from the Gaza strip. This war could escalate further not only to engulf the region but even the Persian Gulf as well.
The ongoing war has the potential to spread further in weeks than what the Ukraine war did not manage in more than 18 months or so. However, the immediate impact of the war has been that gold has at last broken through the shackles of high interest rates imposed by the US Fed by crossing the imaginary boundaries that it set. Despite the pause in the interest rates by the US Fed, the pronouncement by Fed chief that higher interest rates were still on the anvil in 2024 to curb inflation saw gold not only halt its bull run in September but decline sharply to near the $1,800 per ounce region by the first week of October. Therefore, the unexpected turn of events on 7th October saw gold simply take off.
With a few briefs stops to take stock or a couple of steps back due to a cautious approach ingrained into itself due to past experiences, gold soon scaled $1,997 per ounce on 20th October 2023 (with kitco.com London pm fix at $1,988.50 per ounce). It would seem that two simultaneous wars (the Ukraine war since early last year and the latest Israeli war against Hamas) gave gold enough impetus to break free. Is it the breakout moment for gold as it makes yet another attempt to smash through the $2,100 per ounce mark and go further ahead beyond that mark, as has been predicted by many? Or will Jerome “Horatious” Powell once again come to defend the inflation ‘bridge’ and thwart gold for the umpteenth time?
The Mumbai version of the ‘London eye’ may or may not fructify as they are still to finalise the location even after more than 20 years. However, gold did not require a ‘Ferris wheel’ for its own roller-coaster ride in 2023. Gold began its year at $1,835.05 per ounce. Thereafter, it crossed the $1,950 per ounce mark (up by around 6.5%) in early February only to plummet to its lowest for the year at $1,809.05 per ounce (down by over 8%) on 27th February 2023. Then, in anticipation of a lower interest rate hike by the US Fed and geo-political tensions, gold soared by 13.21% to its highest level so far in 2023 of $2,048.45 per ounce (kitco.com London pm fix) on 13th March 2023. Since then, gold has followed this template of several ups and downs in the gold price till 7th October 2023. On this day, the balance of the equation changed with the spectre of a war, started by Hamas on Israel but whose end no one can predict, that could well engulf the entire region right up to the Persian Gulf. As a result, gold seems to be poised to break-out of the Fed chief’s stranglehold on the gold price.
Now, let us see what is different this time around that could aid gold’s bid to break free. With two wars to contend, the scenario is entirely different now. Let us examine various aspects that govern the global markets and their impact on gold; one way or the other. Consider the following:
- Ukraine war: Not much is being heard or read about the Ukraine war since 7th October, when the Hamas first attacked Israeli civilians inside Israel. However, the Ukraine war still continues to inflict damage on both the parties in the conflict. Russia would probably hope that the war effort of NATO allies would shift to Israel and diminish in quantum to Ukraine to give the Russians an advantage to make rapid military gains. Already the US is totally focussed on the Hamas-Israeli flashpoint. For, there is real and persistent threat of the war escalating beyond the region. All of which can benefit gold in a big way.
- Israeli war on Hamas: Nobody as yet is predicting a swift end to this war. The US has even advised Israel not to over-react just like the Americans did in its endeavour to find ‘weapons of mass destruction’ in 1990-91 and the over-the-top revenge attack on Iraq to punish the perpetrators of 9/11 in 2001. What is evident though is that all the peace treaties and normalisation of relations that Israel signed with several Islamic countries recently have come to naught and the entire region has become a powder keg ready to blow up anytime! As long as this continues, gold’s status as a safe haven will be enhanced.
- Chinese economy status: The Chinese economy is probably on a decline. After a good start to 2023, Chinese economic activity has declined much more than anticipated. Exports are said to have fallen sharply while consumption, production and investments have slowed down a tad. Inflation and unemployment numbers too are not very encouraging. China’s GDP growth that had declined sharply by over 5% to 2.99% in 2022 is expected to grow by around 5%. However, the World Bank has predicted a lower GDP for 2024. Then, there are reports that China is selling large quantities of US treasuries worth over tens of billions in dollars terms. It is believed by experts that this liquidation of US bonds would be used to buy more gold from the international markets by the Chinese central bank. All of which could be net positive for gold.
- Central bank purchase of gold in 2023: The year 2022 saw Central Banks across the globe make record gold purchases, well over 1,100 tonnes of gold. Although, it is apparent that the same cannot be repeated in 2023, gold purchases by Central Banks was around 387 tonnes in the first six months of the calendar year. With July accounting for a further 55 tonnes, the year 2023 could see substantial quantities being purchased by Central Banks in the remaining part of the year. Gold’s enhanced status as a safe haven due to the current fluid situation in the world (two major wars, etc.) could only benefit gold further.
- Gold ETFs: Physically backed gold exchange traded funds (gold ETFs) are an important source of gold demand, with institutional and retail investors using them as part of well-diversified investment strategies. In the current year, North American and European investors were net sellers showing outflow of funds from gold ETFs. Overall, gold ETFs at 3,282 tonnes at the end of September were 16% lower than the all-time high level of 3,916 tonnes last seen in October 2020. However, the Asian region, particularly China showed inflow into gold ETFs. The upward trend in the gold price since 7 October has seen further inflows into gold ETFs across countries. If this trend continues, gold ETFs could significantly add to the global gold demand and more than offset any outflows seen in the first half of the year.
- Threat of recession: At the moment it would seem that the US, in particular, has dodged the recession bullet. But recent economic trends suggest that the threat of global recession, particularly in the Western world as well as the US, looms large over 2024. The ongoing situation in the Middle East and elsewhere could only accentuate matters. It should only enhance gold’s safe-haven status.
- Geo-political pressures: The Ukraine war and the Israeli war on Hamas are not the only two trouble spots in the world. The US has sent its ships to the Middle East to deter other countries in the region stepping in to help the Hamas in any way. Moreover, the Chinese too have send six warships to the region to protect its own interests. Apart from that the global hotspots are the Taiwan Strait where the irate Chinese are waiting to teach the Taiwanese a lesson even as they claim that Taiwan is part of China. The US presence in the nearby seas makes that a potential flashpoint. Then, the North Koreans have issues with both South Korea and Japan. Finally, there are two nuclear neighbours in eyeball confrontation across the Himalayas for more than just a couple of years now. The sum total of the above hotspots plus some below the radar keep the world on tenterhooks and gold ready to take off.
- Economic outlook: The immediate impact of the Israeli war on Hamas is that crude oil prices have jumped by around 5% and US bond yields have scaled over 15 year high above the 5% mark. Then, estimates of US economic outlook by a global Swiss Institute put US real GDP growth at 2.1% in 2023 and 0.9% in 2024. Headline Consumer Price Index (CPI) inflation is projected to average 4% in 2023 and 2.5% in 2024. Moreover, the US Fed is also expected to cut interest rates by100 basis points in 2024.
- Indian context: During the third quarter of the calendar year, July-September, 2023, the Indian gold market took advantage of the low gold price to restock in anticipation of the festival and marriage season. As a result, it has low cost jewellery ready to be sold during the ongoing season. The high value jewellery could more than offset any decline in jewellery off-take due to the current all-time high price of gold in the Indian markets of well over Rs.61,000 per 10 gms. Moreover, higher price of gold could see investment demand for gold as a safe haven increase in the Indian market.
Overall, it would seem that the Israeli war on Hamas, in particular, has changed the dynamics for gold. For, though the US inflation for the 12-month period ended 30 September 2023 was 3.7%; it was still above the target of 2% inflation set by the US Fed. The ongoing war would make it difficult for the Fed to raise interest rates in the near future. It would be in a dilemma as to what would constitute too little or too much. The two wars could further fuel inflation given that the US economy has generally shown good numbers with strong consumption as well. Then, there is the danger of becoming too tight and hawkish with interest rates and push the economy into recession. Therefore, the onus is on the Fed chief Jerome Powell.
Gold seems ready for a bull run, unfettered by any parameters or barriers. It is seeing a clear road ahead save a possible inflation barrier. Will Jerome Powell (Aka Horatius Cocles, a Roman officer, who famously almost single-handedly warded off the Etruscan army from crossing a bridge) take his last stand on the inflation front and raise the interest rate hike barrier and thereby thwart gold’s onward march? Or will gold take advantage of the twin-wars and cross over the interest rate barrier? Fingers crossed as gold waits with bated breath!
The views expressed in this article are solely those of the author and do not necessarily reflect the views of the GJEPC.