How Can We Account for the Increase in the Price of Gold?

Economic

Summary:

The price of gold has doubled since 2019, with a notable acceleration in its increase in 2023 . This rise is unexpected, given that rising real interest rates, a slowdown in inflation and a strong dollar should have dragged the price down. Purchases of gold by emerging market central banks and individual investors have bolstered demand, explaining the price increase, against a backdrop of high and persistent geopolitical tensions.

The price of gold is mainly determined by fluctuations in demand

Gold is both a commodity and a financial asset whose price is determined by supply and demand: supply depends on the volume of production and recycling, while demand is contingent on the demand for physical gold (jewellery and technology) and financial gold, which is a function of investor appetite for gold over other assets.

Supply is mainly split between mining production (75% of supply in 2023, source: World Gold Council) and recycling (25%). Mining production is relatively constant from one year to the next, and the cost of producing an ounce of gold is estimated at USD 1,300, which is the de facto floor price for gold. The share of recycling is increasing (up 9% in 2023), boosted by rising prices, but remains modest. - Demand is mainly driven by the jewellery sector (49%), followed by central banks (23%), financial investors (21%) and the electronics sector (7%) – which relies on gold as a key input. China and India account for the bulk of jewellery demand (57%), with America and Europe playing a more marginal role (i.e. 21% combined).

Overall trends in these components of supply and demand have been relatively stable since 2018 (with the exception of 2020, due to the negative demand shock resulting from the pandemic). Supply is increasing slowly, mainly thanks to the build-up in gold recycling while the growth in demand is mainly attributable to emerging market central banks.

The price of gold is a function of US interest rates and inflation, as well as risk aversion

Gold is a non-yielding asset, unlike equities (dividends) and bonds (interest), and has no counterparty risk (i.e. there is no risk of issuer default when gold is physically held); its price is a function of several factors.

Bullish demand factors:

When geopolitical risks increase (as is currently the case with the war in Ukraine and tensions in the Middle East), and more generally when risk aversion increases in the financial markets, gold is much sought after.

Gold is generally seen as a hedge against inflation risk, although it is only an imperfect hedge in reality. While the correlation between the price of gold and inflation was sometimes positive from the mid-1970s through to the end of the 1980s, it was nil or even negative in the 1990s and 2000s, in a context of global disinflation. The correlation between the price of gold and the general level of prices is only really apparent over the long term (10-15 years). Nevertheless, in the short term, a resurgence of inflationary fears or of inflation itself generally triggers an increase in the price of gold.

The impact of these two factors is amplified by the increasing popularity of gold-backed financial products, such as certain exchange-traded funds (ETFs), which have made it easier for both retail and institutional investors to access gold. This consequently increased demand for physical gold (as these ETFs are backed by gold stocks), thereby driving up the price.

Purchases by emerging economy central banks, reflecting a form of diversification away from dollar-denominated assets, either for macroeconomic or geopolitical reasons (‘dedollarisation’).

Bearish demand factors:

Higher real interest rates increase the opportunity cost of gold, which yields no return. As a result, during Fed tightening cycles, gold tends to depreciate in value, although this trend has not been apparent recently (see Chart 2).

A stronger dollar, which makes gold more expensive for buyers whose reference currency is not the dollar. A strong dollar also reflects confidence in the US economy, making gold less attractive as a secure asset.

Generally speaking, risk appetite is negatively correlated with gold, as investors favour exposure to risky assets such as equities and corporate bonds over defensive assets like cash, government bonds and gold.

The increase in gold prices since 2021 appears to have been driven mainly by emerging market central bank buying

Between March and August 2024, gold broke its all-time record price in nominal terms every month, breaking the USD 2,500/ounce threshold in August. When adjusted for inflation, the gold price (see Chart 3) is close to the 1980 peak caused by the oil crisis inflationary shock, and the 2011 peak caused by the sovereign debt crisis in the euro area. It has already passed the peak caused by the 2020 pandemic-related shock.

During the recent period, a number of factors traditionally favourable to a fall in the price of gold have come together:

From 2022 on, the dollar strengthened as a result of the strong US recovery, which led to a sharp rise in inflation, forcing the Fed to act quickly to tighten its monetary policy.

The Fed's tightening cycle has helped drive up real interest rates, which have been back in positive territory since mid-2023, but had previously been negative since 2019 (see Chart 2).

While geopolitical risks have increased globally, risk aversion on the financial markets as measured by equity volatility is at a low point (with the exception of the volatility spike on 5 August 2024, which rapidly dissipated).

Global outflows in ETFs invested in gold were trending downward in 2023 and through to May 2024.

Despite this context, the price of gold has risen sharply, invalidating the traditionally strong correlation between the price of gold and ETF outflows, or with US real interest rates since the start of the war in Ukraine (see Chart 3). This jump appears to be justified by investors buying for non-financial reasons, motivated by geopolitical tensions.

According to World Gold Council data, emerging market central banks, led by Russia and China, have been the principal buyers on the gold market (see Chart 4). Financial sanctions (often using the dollar as an instrument) and the resurgence of geopolitical tensions may encourage some emerging market central banks to diversify their foreign exchange reserves into gold and away from dollar-denominated assets. Although the dollar remains the dominant currency, its share in central bank reserves has fallen to 59%, a 25-year low (IMF). Overall, demand for gold from central banks has doubled over the last two years (from 30 March 2021 to 30 March 2023) compared with previous years, which has had a major impact on the price.

To stay updated on all economic events of today, please check out our Economic calendar

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Warren Takunda

Cryptocurrency

Bitcoin should regain $64,000 “very quickly” as the United States Federal Reserve lowers interest rates.

In its latest monthly update report on Sept. 17, quantitative Bitcoin and digital asset fund Capriole Investments said that BTC price action was at a key crossroads.

Capriole founder “would not be surprised” at $64K BTC price

Bitcoin stands to benefit exponentially from macroeconomic shifts into Q4, itself the market’s best quarter, Capriole Investments founder Charles Edwards says.

While barely moving in the past month, BTC/USD is now primed to resume classic bull market moves should the Fed drop interest rates at its Sept. 18 meeting.

“This marks the start of a new dovish Fed policy regime, the first significant change since late 2021, when the Fed notified of their hawkish regime shift and which saw rates rise from 0 to 5.5% in 18 short months,” the report stated.

“This Hawkish regime also coincided with Bitcoin’s collapse from $60K to $15K. We are now at the start of the exact opposite regime.”

Barring any “bearish surprises” from the Fed, BTC/USD thus has $64,000 in its sights, having preserved weekly support, as shown by data from Cointelegraph Markets Pro and TradingView.

“While ugly, and still in a trend of lower highs and lower lows (net “bearish”), weekly support is responding well at $58K today. A weekly close above $64K would end the 7 month sequence of lower highs and likely see us travel back to range high ($70K) with haste, and probably beyond. Nonetheless, the Technicals picture is mixed at best, and bearish at worst, until the range (and monthly resistance at $60K) is reclaimed,” Edwards continued.

“Based on the current response to the Weekly $58K level, and given the major Fed event tomorrow, I would not be surprised to see that level taken very quickly to the upside, provided no bearish surprises from Chairman Powell tomorrow.” Bitcoin Price Can See $64K 'Very Quickly' on Fed Rate Cut — Research_1

Bitcoin Price Can See $64K 'Very Quickly' on Fed Rate Cut — Research_1

BTC/USD 1-week chart. Source: TradingView

Bitcoin onchain supply data too bearish

The report cast aside concerns over shifting BTC supply trends, arguing that new phenomena such as the US spot Bitcoin exchange-traded funds (ETFs) had skewed perspectives.

“2024 has seen massive capital re-distribution as a result of the ETF launch and Mt Gox. This capital movement has mischaracterized many on-chain metrics and told us a false narrative,” Edwards argued.

Going further still, the findings suggested that data covering supply ownership by time spent dormant — metrics which give rise to the popular “long-term holder” and “short-term holder” cohorts — are unreliable in 2024.

“In short, the last 6 months has seen on-chain metrics be massively ‘manipulated’ by huge supply re-classification, which on net did not see any significant organic long-term holder selling. This resulted in many on-chain metrics seeing extremely bearish readings comparable with prior cycle tops, as we discussed 2 months ago in Update 52,” the report read.

“This means that any on-chain metrics with ‘long-term holder’ data, or ‘supply last active more than XX months/years’ cannot be trusted in 2024. Yet these classifications form the basis of a significant portion of valuable on-chain metrics.” Bitcoin Price Can See $64K 'Very Quickly' on Fed Rate Cut — Research_2

Bitcoin Price Can See $64K 'Very Quickly' on Fed Rate Cut — Research_2

BTC supply data (screenshot). Source: Capriole Investments

Edwards instead sees a bullish mid-term picture for BTC/USD.

“With Bitcoin trading within 2% of our last update, our view from Issue 53 that we are at a major pivot point remains,” he concluded.

He referenced the timing around Fed policy easing — Q4 is traditionally when Bitcoin puts in some of its best performance, while BTC/USD is also due to end its standard post-halving consolidation period.

“What lies ahead? Seasonally we have the best two quarters just 2 weeks away from us, which are also within the best 12-18 month window to be allocated to Bitcoin every 4 years, and at the start of a dovish Fed multi-year regime which will see growing liquidity injected into risk assets,” he wrote.

“We also have Gold paving consistent new all time highs since its break out a few months ago. You couldn’t ask for more favorable conditions for Bitcoin.” Bitcoin Price Can See $64K 'Very Quickly' on Fed Rate Cut — Research_3

Bitcoin Price Can See $64K 'Very Quickly' on Fed Rate Cut — Research_3

BTC/USD quarterly returns (screenshot). Source: Capriole Investments

Source: Cointelegraph

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SAXO

Commodity

Gold’s record-breaking rally continues, with spot bullion now approaching USD 2,600 per troy ounce, reflecting a year-to-date gain of over 25%. This surge means a standard 400-troy-ounce gold bar (around 12.4 kilograms or 27.4 pounds), commonly traded internationally and used by central banks, now costs over USD 1 million, up from USD 725,000 last October. This increase followed heightened Middle East tensions after Hamas' attack on Israel and growing expectations of a shift in the US interest rate cycle from hikes to cuts, as well as continued central bank demand and speculative buying from hedge funds.

Since then, gold has surged nearly USD 800, with only minor corrections during this extended rally—showing strong underlying momentum, driven by FOMO (fear of missing out), which is rarely sustained for this long. As we’ve highlighted, gold’s rise—despite being a ‘dead’ asset that offers no returns beyond price appreciation minus its funding or opportunity costs relative to short-term bond yields—reflects a world in imbalance. Uncertainties are driving demand from investors, both institutional and individual, as well as central banks.

In our recent update, we noted the contributing factors to gold's rally: fiscal instability, safe-haven appeal, geopolitical tensions, de-dollarization, and anticipated Fed rate cuts. The first of several cuts is expected on 18 September, during the long-awaited FOMC meeting. While the size of the cut (either 25 or 50 basis points) may trigger short-term volatility, the fundamental drivers of gold's rally are unlikely to fade, signaling potential further gains in the coming months. As the opportunity cost of holding gold decreases, we may see increased demand for gold-backed ETFs from asset managers, especially in the West, who up until May had been net sellers since the FOMC began its aggressive rate hikes in 2022.

With Gold Reaching New Heights, Silver Shows Potential_1

What are the risks?

It’s important to remember that no asset, including gold, rises in a straight line. Price corrections are inevitable. One key risk is the buildup of speculative long positions. If gold traders anticipate higher prices and the metal falls below key support levels, this could trigger a wave of selling as positions are unwound, further pushing prices down. Additionally, any easing of geopolitical tensions could reduce gold’s appeal as a safe haven, encouraging investors to pursue riskier, higher-yielding assets. Lastly, central banks and investors may hesitate to buy at such elevated levels, fearing overvaluation, which could reduce demand and weigh on prices.

Silver follows gold – but faster

While gold’s new record high has captured most attention, silver has outperformed this month, delivering returns twice as large. Silver’s dual role as both a precious and industrial metal means its price is influenced by gold, industrial metals, and the dollar. After hitting a decade-high of USD 32.50 in May, silver experienced a deep correction alongside industrial metals due to concerns about Chinese demand. Between May and August, the gold-to-silver ratio widened from 73 ounces of silver per ounce of gold to 90 ounces.

However, a continued gold rally and a recovering industrial metals sector, supported by a weaker dollar, have brought the ratio back down to 84, with silver once again outperforming gold. Investors cautious about paying record-high prices for gold may see better value in silver, which remains well below its 2011 record of USD 50. For silver to attract more buyers, a break above the May high is needed. Momentum funds currently hold a relatively small speculative long position in silver, at 27k contracts, just above the five-year average, compared to gold’s much larger 227k net long position, which is double its five-year average. With Gold Reaching New Heights, Silver Shows Potential_2

With Gold Reaching New Heights, Silver Shows Potential_2

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Warren Takunda

Stocks

Asian shares were trading mixed Wednesday as markets focused on prospects for the U.S. Federal Reserve’s first cut to interest rates in more than four years.

The Bank of Japan and the Bank of England are also holding monetary policy meetings later this week. But neither central bank is expected to move on rates, although the language of what the officials say could be an indicator of later moves and still influence markets.

Japan’s Nikkei 225 gained 0.2% in afternoon trading to 36,269.04. Australia’s S&P/ASX 200 inched down nearly 0.1% to 8,134.40. South Korea’s Kospi added 0.1% to 8,134.40. Trading was closed in Hong Kong for a national holiday. The Shanghai Composite index edged 0.1% lower to 2,701.15.

The Fed’s announcement is scheduled for Wednesday, with the overwhelming expectation on Wall Street for a cut to the federal funds rate. The rate has been in a range of 5.25% to 5.50% for over a year.

Lower rates would help boost the slowing economy, as it has become increasingly more expensive to borrow money for everything from houses to cars to corporate debt.

The Fed has been keeping its main interest rate at a two-decade high in hopes of grinding down on the economy enough to stifle high inflation.

In Japan, the nation’s trade deficit totaled 695 billion yen, or $4.9 billion, down 26% from a year earlier, according to the Finance Ministry, recording a deficit for the second month straight.

Exports totaled 8.4 trillion yen ($59 billion), up 5.6% from the same month the previous year. Shipments to Asia rose while exports to the U.S. fell.

Imports totaled 9.1 trillion yen ($64 billion), up 2.3% from a year earlier. By region, imports from European nations, in categories such as pharmaceuticals, showed the strongest growth.

Both numbers fell short of forecasts for 10% growth in exports and and even higher increases for imports.

The Japanese yen has gained in value against the U.S. dollar in recent weeks, helping to boost the country’s purchasing power. The dollar had traded at levels over 150 yen earlier this year but in recent days has dipped.

The U.S. dollar slipped to 141.33 Japanese yen from 142.34 yen. The euro cost $1.1123, up from $1.1117.

On Tuesday, the S&P 500 edged up less than 0.1% to 5,634.58. It remains 0.6% below its all-time closing high set in July, and it briefly rose above that mark during the morning.

The Dow Jones Industrial Average slipped less than 0.1% to 41,606.18 from its own record set the day before, while the Nasdaq composite edged up by 35.93, or 0.2%, to 17,628.06.

Intel helped drive the market with a gain of 2.7% following a series of announcements, including an expansion of its partnership with Amazon Web Services to produce custom chips. Intel also detailed plans to build its foundry business.

But some reports released Tuesday on the U.S. economy were better than expected, including one on U.S. consumer spending. That’s likely a sign the American economy will not nose-dive into a recession.

A separate report said U.S. industrial production returned to growth in August and was stronger than economists expected.

In the bond market, the 10-year Treasury yield rose to 3.64% from 3.62% late Monday. The two-year yield, which more closely tracks expectations for the Fed’s actions, rose to 3.59% from 3.56%.

In energy dealings, benchmark U.S. crude declined 47 cents to $70.72 a barrel. Brent crude, the international standard, fell 51 cents to $73.19 a barrel.

Source: AP

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Alex

Commodity

Energy

India will drive up to 35% of global energy demand growth over the next 20 years, petroleum minister Hardeep Puri said at the Gastech conference that started on Tuesday in Houston.

“If you say that global demand is increasing by one percent, ours is increasing by three times that,” Puri said. “In the next two decades, 35% of the increase in global demand will come from India.”

At the same time, the official said that India wants to succeed with the energy transition as well. “We will manage and succeed…on the green transition,” Puri said. “That’s the part with which I am most satisfied.”

India is already one of the biggest drivers of energy demand growth and a top energy importer. Earlier this year, the U.S. Energy Information Administration forecast that the country’s industrial expansion and energy demand was going to drive a threefold increase in natural gas demand.

In 2022, India’s natural gas consumption amounted to 7.0 billion cubic feet per day, with over 70% of the demand coming from the industrial sector. By 2050, India’s natural gas consumption is set to more than triple to 23.2 Bcf/d, according to EIA’s estimates.

Oil demand on the subcontinent is also on the rise, which has prompted plans to boost refining capacity significantly. At the end of last year, the country’s petroleum ministry announced plans to expand refining capacity by 1.12 million bpd every year until 2028.

Total Indian refining capacity is expected to increase by 22% in five years from the current 254 million metric tons per year, which is equal to around 5.8 million bpd, according to these plans.

Yet India is also eager to take part in the energy transition. It already has ambitious targets, seeing 500 gigawatts of renewables capacity installed by 2030, compared to around 153 GW capacity now.

Earlier this month, Renewable Energy Minister Pralhad Joshi said that a number of banks had pledged a total of $386 billion in investment commitments to help India boost its renewable energy industry.

Source: OILPRICE

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Cohen

Economic

Indonesia's central bank delivered its first rate cut in more than three years on Wednesday, opting to move hours ahead of the widely expected start of the US Federal Reserve's (Fed) easing cycle in a bid to bolster growth in Southeast Asia's largest economy.

Bank Indonesia (BI) unexpectedly trimmed the benchmark rate by 25 basis points to 6.00%, its first rate cut since February 2021. Only three out of 33 economists polled by Reuters had predicted the move, while all the others expected rates to be held steady.

BI also cut the overnight deposit facility and lending facility rates by the same amount to 5.25% and 6.75%, respectively.

The decision is consistent with BI's expectation that inflation will remain low in 2024 and 2025, an expectation of a stable rupiah and the need to bolster economic growth, BI governor Perry Warjiyo said.

The rupiah had been under pressure earlier this year in response to changing risk appetite in global financial markets, but has since reversed those losses against the US dollar to be trading slightly firmer than last year's close.

The currency weakened slightly to 15,355 per dollar soon after BI's announcement, from 15,345 beforehand.

Inflation in Southeast Asia's largest economy returned to within BI's target range in mid-2023 and has remained there since. August's inflation rate of 2.12% was the lowest annual rate since February 2022.

Source: Theedgemarkets

To stay updated on all economic events of today, please check out our Economic calendar

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Danske Bank

Central Bank

Economic

In focus today

Today’s main event will be the FOMC rate decision at 20:00 CET – we expect a 25bp cut of the Fed Funds Rate target (to 5.00-5.25%). This morning markets price in a 65% probability for an even bigger 50bp rate cut. Even though the Fed will now initiate its rate cutting cycle, we do not expect changes to the pace of QT. We expect the updated rate projections to signal a total of 3x25bp rate cuts in 2024 (prev. 1) followed by 6x25bp cuts in 2025 (prev. 4). See Research US – Fed preview: Dovish 25bp, 13 September.

In the euro area, we receive the final inflation data for August. The release will allow us to investigate the inflation drivers in August and we particularly look out for the ‘LIMI’ indicator of domestic inflation. Recently, domestic inflation has remained high and is a key reason we expect only a gradual cutting approach from the ECB.

From Sweden, August LFS is out this morning, expected to show a slight increase in seasonally adjusted unemployment to 8.5%. More interesting however is to gauge the developments in employment and hours worked as these give clues to household income growth and production activity. Both these factors surprisingly dropped in July, but we expect a bounce back now.

Economic and market news

What happened yesterday

In the US, retail sales increased by 0.1% (prior: 1.0%, consensus: -0.2%) in August, so a slight increase instead of a slight decrease. This signals that consumer spending remains stable. Industrial production came in stronger than expected at 0.8% (prior: -0.9%, consensus: 0.2%). We do not expect these numbers to affect the rate decision today, where our base case is a 25 bp rate cut, as stated above.

In Germany, the ZEW index declined more than expected in September. The expectations component plunged to the lowest level in a year while the assessment of the current situation component fell to the lowest level since Covid. The assessment of the current situation has been stuck at very low levels during the past year and the expectations component has now fallen in the past three months following a strong rebound in spring.

In Canada, consumer prices rose 2.0% y/y in August (prior: 2.5%, consensus: 2.1%), and fell by 0.2% m/m (prior: 0.4%, consensus: unchanged). The weaker than expected inflation print has led to some market speculation that the Bank of Canada (BoC) could be in for a 50bp rate cut at the October meeting. At the monetary policy announcement earlier this month BoC governor Macklem said that the central bank must increasingly gauge against the potential of inflation falling below target due to weak economic growth. Markets still price in biggest probability for a 25bp cut, but the probability of a 50bp rate cut rose from 46% to around 47.5% after the release.

Equities: Global equities were fractionally higher yesterday yet remained in a state of wait-and-see ahead of tonight’s highly anticipated FOMC meeting. Despite this, the sentiment leading up to the FOMC meeting has been positive, with the S&P 500 surpassing its mid-July peak. Yesterday also saw a decent cyclical outperformance, bolstered by a positive reception to a potential 50bp cut as small caps outshone others. In the US yesterday, Dow -0.04%, S&P 500 +0.03%, Nasdaq +0.2% and Russell 2000 +0.7%. Asian markets were mixed this morning, with Japan making up some of yesterday’s losses. US futures were marginally higher, while European futures edged lower.

FI: The main event today is the FOMC meeting tonight to see whether the Federal Reserve will cut by 25bp or 50bp as well as the comments regarding future monetary policy. The market is divided between a 25bp or 50bp rate cut, as there are pros and cons for both a 25bp or 50bp rate cut. We believe it will be a 25bp cut, but a positive market reaction depends on the comments after the meeting. If the Federal Reserve cuts “only” by 25p it is expected that they will strike a dovish tone afterwards.

FX: Yesterday’s session was generally muted, with no notable moves in the G10 space, as markets await the crucial FOMC meeting today. The USD strengthened slightly, with EUR/USD remaining just above 1.11, while USD/JPY drifted back above 142. Scandies were little changed, with EUR/NOK just below 11.80 and EUR/SEK just above 11.30. Markets are clearly waiting for the FOMC decision, which could potentially set the near-term tone for various crosses and overall risk sentiment.

To stay updated on all economic events of today, please check out our Economic calendar

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