Gold: The three reasons for ejecting the price – What are its prospects

His record recorded for four consecutive days and is now at a high all-time about $2,195 per ounce. One reason for the recent gold price rally is the growing hope of falling interest rates, but experts say that this alone cannot explain it. They attribute recovery to a complex mix of different factors and expect prices to continue to rise in the medium term, but also a correction in the short term. Similar to gold, Bitcoin also benefits from market expectations that interest rates should slowly decrease again and sometimes increased to the high record of $70,175 at the end of last week. There was also some correlation in investor behavior in gold and Bitcoin in previous days. If interest rate cuts become more likely, this usually enhances the price of gold. On the contrary, high interest rates burden prices, because precious metal produces no current income. Compared to other secure shelter assets, such as US bonds, gold loses its attractiveness in such an environment, notes Handelsblatt. Federal Bank President Jerome Powell had recently stated that interest rate cuts were approaching and Christine Lagarde, president of the European Central Bank (ECB), also expressed the prospect of starting the monetary policy recovery in June. However, these statements essentially confirmed investor affairs. Therefore, many gold experts are concerned about what different factors could have caused the gold record hunt. Because most people agree to what UBS analyst Giovanni Staunovo says: “There is no clear trigger this time”. 1. China’s gold fever A key factor in the price of gold this time is natural demand for precious metal, according to Nitesh Shah, head of commodity and macro-economic research into the Wisdomtree asset manager. Chinese gold imports are at a high level and central banks have been buying more gold than ever in the last two years. According to Shah, the trend of markets from central banks could even continue for another decade or even two decades. ‘The central banks of emerging markets still have significantly less gold in their portfolios than the central banks of G7, so there is still a large margin for improvement’, he believes. In addition, central banks will offset possible sanctions from G7 countries with gold. In the event of sanctions, central banks may continue to have free gold. According to Shah, factors such as physical demand from investors and central banks are actually of secondary importance to shaping the price of gold to date. Now, however, they could be in focus. According to the World Gold Council (WGC) association, central banks continued to buy large quantities of gold at the beginning of the year. In January, the total amount amounted to 39 tonnes – more than twice that of December. The figures for February are not yet available, but only the Chinese central bank purchased another twelve tons of gold and the Indian central bank nearly five tonnes. As Adrian Ash (Adrian Ash), head of the research on the Bullionvult gold merchant, central bank markets and demand for natural gold from Chinese and Indian households have clearly supported the price of gold. John Reade, head of a strategic market at the Gold World Council, has a more differentiated view. At the beginning of the year, demand from Chinese households was strong, Reade says. “However, when the price of gold broke out in early March, the implicit demand from China seems to have slowed significantly”. He sees the direct reason for the price increase in early March more in future contracts markets in the US. 2. Bets on the future contract market According to Reid, the number of open term contracts investors use to bet on gold price movements on New York’s Comex futures stock exchange increased by about 80,000 contracts last week. This would correspond to a volume of about 240 tons of gold. “If open contracts are rapidly increasing at the same time as the price of gold, this strongly suggests new speculative market positions have been obtained in Comex,” Reid explains. In other words, traders bet on rising prices. Future performance contracts are forward transactions: the seller is contractually obliged to deliver a certain quantity of the merchandise to the buyer at a previously agreed date and price. And the buyer in turn undertakes to collect the merchandise. UBS analyst Staunovo (Staunovo) also assumes that the markets of central banks have supported the price of gold – but the short-term boost came from the purchase of future contracts, where potential market positions were created and sales positions decreased. In such short-term speculation, investors borrow assets such as shares or gold and sell them with the expectation that they will be able to buy them back cheaper before the return date. If the calculation comes out, the difference between the sale price and the repurchase price is the profit minus a small loan fee. When many short traders liquidate their positions simultaneously, the price rises. According to Wisdomtree’s gold expert, Shah, this could just happen. At the end of 2023, many merchants bet on falling gold prices and again when the gold fell briefly below $2,000 per ounce in February. “When prices went up again, the first merchants unwrapped their short positions. The price then continued to increase, so more traders had to close their short positions and the price increased even more,” says Shah. In other words, it is a domino phenomenon. But the Ash expert from Bullionvult doubts this theory. This is because the data from the CFTC indicate that in the last week of February, the speculators in the forward markets advanced to more market positions than sales positions. CFTC released new evidence Friday night. They show that long-term positions of fund managers increased by more than 92% overall between 27 February and 5 March. This is the largest percentage increase since October 10, Ash says. Nevertheless, net market positions – i.e. the difference between market positions and sales positions – are only at a high of nine weeks, despite almost doubling. 3. Geopolitical risks In addition to hopes of reducing interest rates in the US and the eurozone, geopolitical risks may also have contributed to the gold rally, Shah from Wisdomtree believes. The gold price was initially increased after Hamas’ terrorist attack on Israel on October 7, 2023, but then retreated again. Many investors had prepared for a limited bilateral conflict, Shah explains. But now it’s March and the Huthi rebels continue to attack ships in the Red Sea. “Many now realize this war will last longer and compensate for odds”. However, speculative traders in Comex tend to be guided by technical indicators, according to market chief strategic analyst WGC, Reid. Alexander Zumpfe, a gold merchant in the Heraeus company, specializing in precious metals, agrees: The price of gold has entered an upward trend with its rise over the historic high of December and this has caused technically oriented monitoring markets. In fact, fundamental risks and technical trading marks could be closely linked. The lessons of the past According to Bullionvault gold expert Ash (Ash), gold has scored high all-time in four consecutive days 33 times over the last 55 years. In spring 1969, for example, prices increased as speculations that the US would abandon the connection of the dollar to gold increased to $35 per ounce. Four times in history there was also a six-day record hunt, for example in May 1973 in the wake of the oil price crisis. In 2008, gold even had a seven-day run, as the financial crisis accelerated. Examples show: As a rule, geopolitical and economic crises have been the trigger for recovery. In early August 2020, amid the coronaean pandemic, the gold price also rose to a high record for three consecutive days, according to Ricardo Evangelista (Ricardo Evangelista), analyst of the stockbroker Activtrades. According to Wisdomtree expert, Shah (Shah) the rise in August 2020 was rather unusual. On an annual basis, the gold price was then 40% higher, ten percentage points more than Shah had predicted. “The reason for this unusually strong increase was that transactions were quite sparse at the time and prices could move strongly with large positions”. The price analysts’ expectations both Shah (Shah) and UBS analyst Staunovo (Staunovo) point out that there could be a short-term correction to the gold market after the rally. In the medium term, however, both expect price increases: Shah (Shah) sees as a target the price of $2,210 per ounce by the end of the year, while Staunovo currently assumes that the price can reach $2250. Evangelista from Activtrades also sees room for upward movement: “The significant resistance to $2100 has been overcome, so we see the possibility of rising prices, possibly reaching $2200 or more,” he says. The gold merchant of Theraeus, Chubfe (Zumpfe), sees the gold negotiate in a price range of up to US$2250 this year. However, it also expects a stabilisation for the time being, because the market is clearly overmarketed. Technically speaking, Jörg Scherer, head of HSBC Germany’s technical analysis, also considers that prices up to $2,250 per ounce are possible. After the brief correction phase a few weeks ago, the gold price not only recovered, but escaped upwards. This shows “that the initial upward trend was stronger.”

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