Contrasts in the gold market are more visible than ever

26 Nisan 2024

Today market analysis on behalf of Hani Abuagla Senior Market Analyst
at XTB MENA

Contrasts in the gold market are currently more visible than ever before. Just recently,
historical highs were recorded at just over $2,430 per ounce, and a few days later, the
largest daily loss in many years was recorded. Furthermore, gold remains only 5% away
from historical highs, with US yields exceeding 4.6% and ETF funds holding the smallest
amount of gold since September 2019. With such extremes, does the price of gold above
$2,300 per ounce not seem too high? Or perhaps the reversal of some conditions could fulfil
some financial institution forecasts of precious metal reaching $3,000 per ounce.
Analysing the commodity markets, we almost always look at the supply and demand
relationship. In the case of gold, we have been observing excess supply for years, but in this
case, it is not as much of a problem as it is for oil or industrial metals, which are not assets
considered to be storer of value.

The largest part of global demand for gold comes from thejewellery sector, whose share in total demand often exceeds 50%. However, it is worthnoting that this demand is rather stable, or its dynamic changes are not too significant fromyear to year. We observe significantly greater changes in investment demand for physicalgold and from central banks. Recently, the share of these two groups has been increasing toalmost 50%, although not long ago it was below 50%. If we add ETF funds, which also investin physical gold, their share at one point approached 60%. This happened in 2020 when thetremendous liquidity in the market caused by the actions of central banks and governmentsduring the pandemic led to a buying frenzy in many markets.

Since then, investors havebeen withdrawing their funds from ETFs, turning more towards the stock market or even
recently towards the cryptocurrency market. Could interest rate cuts in the US change this trend? It might seem that the prolonged period of waiting for cuts favours further increases in gold prices. However, in this case, a coincidence occurred in the form of a series of geopolitical conflicts around the world, which, along with growing demand for gold, further fuelled its rise. The war between Russia and Ukraine led to an increase in gold prices above $2,000 per
ounce.

Certainly, the risk for the price of gold is a complete de-escalation of the geopolitical situation
worldwide, which would reduce demand for safe haven assets. On the other hand, stock
markets remain very overbought, so the risk in the market remains very high. The second
factor that threatens gold and other metals is the potential return of high inflation, which
would force central banks to return to raising interest rates.