Recently, the prices of gold have surged unexpectedly, raising various questions despite the prevailing view attributing this to the divided geopolitical climate and vague predictions about the global economy. The precious metal is seen as a "safe haven," and the general consensus is that bullion prices should rise when interest rates decrease—which many investors expect to happen later this year. But why is gold rising suddenly now?
After trading within a relatively stable range for several months, bullion began to rise in early March by 14%, breaking a series of daily records. However, geopolitical tensions have been high for months, even years, and if anything, the expectations for when the Federal Reserve might cut interest rates have grown murkier in recent weeks. So, what has changed?
Bloomberg reviewed the responses of seasoned executives and analysts, which seemed to differ significantly regarding the catalysts behind gold's unprecedented highs: Are central bank purchases and concerns over the dollar's role as an economic weapon driving it? Are funds betting that the Fed’s shift toward interest rate cuts is imminent? Are algorithmic traders drawn to gold simply because it is rising? Persistent inflation and fears of a sharp downturn? Weakening currencies? Upcoming elections? All of the above?
**Who Is Buying Gold?**
Central banks are the most prominent recent buyers of gold, along with major institutions and traders preparing for a shift to more flexible interest rates. Chinese consumers are worried about declining yields in other assets and currency depreciation.
However, these groups have been a steady upward force for months—or years, in the case of central banks—and it is unclear why any of them would increase purchases with a significantly heightened sense of fear, greed, or abundance.
**What Are They Specifically Buying?**
One clear and surprising aspect is that investors are not purchasing exchange-traded funds (ETFs), which are among the easiest ways to gain exposure to gold. The continuous outflow from gold-backed ETFs indicates a large group is either missing or pulling out funds.
Nit Jerasi, head of an ETF store, stated, "This is one of the oddest phenomena I've ever seen in the ETF space. Notably, demand for gold has been very strong in other channels, such as central bank purchases and direct acquisitions by individual and private investors."
Long-term profit-taking by investors who bought years ago explains why CitiGroup sees a significantly weak net flow in ETFs. The fact that consistent and large outflows had little impact on prices suggests strong demand for the bullion they were selling, with central banks likely being natural buyers, according to Joe Cavatoni, who oversees the ETF report from the World Gold Council.
**Where Are They Buying From?**
In larger futures markets and over-the-counter markets, trading activity has surged, suggesting that familiar institutional buyers—central banks, investment banks, pension funds, and sovereign wealth funds—are all participating. Options activity is also rebounding, with expectations that bullion prices may rise further as options traders rush to cover their exposures.
The number of open contracts in New York futures is increasing, indicating that long-term bets by money managers are on the rise. However, overall trading volume has surpassed open contract numbers, indicating a jump in the frantic algorithmic trading funds operating in this space.
The gold market is known to be sensitive to shifts in U.S. economic data, and this has become truer since prices began rising in early March. Major economic releases during that period provided readings on manufacturing strength, job growth, GDP, and inflation, while a concentrated buying surge following the data served as strong evidence of who the influential players are.
However, this has confused analysts, as recent data has been strong, leaving currency and bond market investors reacting with bets that the Fed's pivot may come later and be less severe than expected a few months ago.
Theoretically, this would be negative for gold since higher interest rates diminish the appeal of bullion compared to yield-bearing assets like bonds. Investors are also driving up the dollar's value, which has made gold considerably more expensive for buyers in the largest consumer markets: China and India.
**Why Are They Buying Now?**
This is the big question. The glaring gap in the narrative over the last five weeks is that while the Fed is still expected to start cutting interest rates this year—which would benefit gold—many investors have become less convinced about the timing than they were a few months ago.
One possibility is that some gold investors are instead focusing on the prospect of a sharp downturn in the U.S. economy based on recent data and are quickly buying bullion for its role as a safe haven.
This notion may also provide insight into another strange movement in the gold market in recent weeks—the relationship between gold price spreads, closely monitored, and the interest rates imposed by the Federal Reserve. The percentage yield between the spot price in London and the three-month futures—often tracking interest rates due to storage, financing, and insurance costs—has seen a rare decline below Federal interest rates in recent weeks as spot prices rise. Historically, this only occurs on a sustainable basis when interest rates are low or about to decline sharply.
The inverted spread may indicate that anxious investors are demanding immediate spot gold as protection against potential disruptions. Ole Hansen, head of commodity strategy at Saxo Bank AS, stated, "The rise challenges much conventional thinking, especially regarding interest rates that remain high. I believe the narrative is shifting towards persistent inflation and possibly a sharp downturn, flavored with much geopolitical uncertainty and a retreat from globalization that drives central bank demand."
