What is keeping gold prices at record levels?
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The price of gold on the world market has reached a new historical high. Since the beginning of the month, it has increased by almost 10%, to $2.2 thousand per troy ounce. However, ruble prices for the precious metal remain near the two-year high set in March 2022. Taking into account the expected increase in dollar prices and the further weakening of the ruble, the interest of local investors in this asset remains.
Central banks support
Last week, the price of gold on the global spot market updated historical record. On Thursday, according to Investing.com, quotes for the precious metal reached $2,218.65 per ounce, exceeding the previous high set on March 8. It was not possible to gain a foothold above the level of $2.2 thousand, and on Friday the quotes rolled back to $2.17 thousand per ounce. However, this result is 0.6% higher than the closing value of a week ago and 7.2% higher than the values of the end of February. Since the beginning of the year, the precious metal has risen in price by almost 10%.
The renewal of the historical maximum was facilitated by the results of the Fed meeting, which ended last Wednesday. As most analysts expected, the American regulator saved key rate of 5.25–5.5%. In an accompanying release, the FOMC expressed concern that inflation still remains high, although in its forecast by the end of the year it did not rule out a reduction in the interest rate corridor by 0.75 percentage points, to 4.5–4.75%. Traders currently rate the likelihood of the Fed’s first rate cut in June at 68%, according to the CME FedWatch Tool. “The demand for gold is driven by the expectation of increased liquidity in the global economy as monetary conditions soften,” says Evgeniy Mironyuk, a stock market expert at BCS World of Investments.
However, the main driving force behind the rise in prices for the precious metal remains purchases from central banks of developing countries.
Financial regulators purchased 39 tons of the precious metal in January, more than double December 2023 purchases, according to the World Gold Council (WGC).
The key buyers were the central banks of Turkey (11.8 tons), China (10 tons) and India (8.7 tons). “The People’s Bank of China has been increasing its investments for the 16th month in a row amid growing demand for gold due to growing risks in the stock market and real estate market,” notes Dmitry Smolin, senior analyst at the Sinara investment bank.
Waiting for a bid
Sovcombank chief analyst Mikhail Vasiliev does not rule out fixing gold prices in the range of $2,200–2,300 per ounce. This will be facilitated by a reduction in the Fed’s key rate in the second half of the year and a program to gradually reduce assets on the regulator’s balance sheet from the current $95 billion per month to zero. “As a result, dollar interest rates will begin to decline this year and the dollar will weaken, which is positive for gold,” notes Mr. Vasiliev.
High geopolitical risks that will persist this year will also support the interest of world central banks in the precious metal as an alternative to US Treasury bonds (UST). “The US elections on November 5 and the sharp confrontation between Donald Trump and Joe Biden contain domestic political risks, which could also stimulate demand for gold,” notes Mikhail Vasiliev.
At the same time, Dmitry Smolin is more conservative and does not rule out a return of prices to the level of $2 thousand per ounce.
“With current record prices, we can see a decrease in demand from the jewelry industry,” explains the expert.
And, in his opinion, purchases by world central banks could stop at any time. In addition, inflation risks remain in the United States, which means the Fed may refrain from easing monetary policy. This is not ruled out, in particular, by Vanguard senior economist Shaan Raitata.
Noble insurance
On Thursday, at trading on the Moscow Exchange, the price of the precious metal exceeded 6.5 thousand rubles/year for the first time since March 2022. However, on Friday the quotes also rolled back to the closing value of the previous week – 6.47 thousand rubles/year. However, this result was 9% higher than the value at the beginning of the month. Price dynamics on the Russian market were also influenced by movements in the dollar exchange rate. At the end of the week, quotations of the American currency reached 92.8 rubles/$, which is 1.8% higher than the value at the beginning of the month and 2.7% higher than the value at the beginning of the year.
Taking into account the ongoing devaluation risks, the protective properties of the metal will remain the main catalyst for demand for it from local investors.
In the third quarter, according to Mr. Vasiliev, the average dollar exchange rate could be 100 rubles/$, and in the fourth it could reach 101 rubles/$. He identifies several factors contributing to the weakening of the ruble: easing the conditions for the mandatory sale of foreign currency earnings after April 30, a gradual decrease in the key rate from the third quarter from the current 16% to 12% by the end of the year, a seasonal increase in demand for foreign currency since May, a gradual decline in oil prices Brent to $75 per barrel by the end of the year due to the slowdown in global economic growth. “Gold can replace demand for “toxic” currencies, because prices for the precious metal are denominated in the US dollar. Therefore, we expect continued high demand from individuals this year,” notes Daniil Bolotskikh, leading analyst at Digital Broker.
Defensive options
One of the most popular investment instruments are precious metal bars, which are primarily of interest to wealthy investors. In 2023, according to the Ministry of Finance, private investors bought 95 tons of metal from banks, spending more than 500 billion rubles on it. However, when purchasing ingots, it is worth considering the disadvantages of this method of investing in metal, which include the costs of storing them. Depending on the bank and the type of bullion, such expenses can amount to 1.5–18 thousand rubles. per ingot. In addition, banks still maintain a wide bid-ask spread, which can range from 5-20%. In addition, the liquidity of such investments is not the highest.
In this regard, exchange-traded instruments are more popular, especially among private investors. In contrast to the physical storage of metal in exchange-traded instruments, it is stored in NCC. The spread between the purchase and sale prices is minimal, and the instrument can be sold on any trading day if there is demand.
However, it is worth considering that when trading gold on the exchange you will have to pay a brokerage commission, which can reach up to 1.5–2% of the transaction size. In the case of mutual funds, in addition to the brokerage commission, the management fee will be regularly withheld, which, depending on the fund, amounts to 0.2–2.4% of the value of the assets. When choosing a mutual fund, it is worth considering the structure of the fund, since in the case of funds investing in ETFs or other gold mutual funds, the commission will be double.
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