Gold is the ultimate safe haven, which is why whenever war alarms sound or an escalation into conflict begins, money usually floods in. with forced marches towards the yellow metal. However, something strange happened this time. The past week has been one of the most geopolitically chaotic ever, with Israel’s invasion of southern Lebanon and the Israeli-Iranian escalation with an attack on the country of the Ayatollahs and, later, with the recognition by Joe Biden himself of the possibility of an Israeli conflict. “revenge” by attacking Persian oil infrastructure. To culminate and with tension at an unprecedented level, the new week begins with new attacks by Ukraine on Russian oil factories.
However, after climbing 30% this year last week, gold did not rise at all, trading completely flat, breaking from very positive weeks and leaving the price of an ounce at 2.667. A strange shutdown of a commodity that continues to grow throughout the year and which chose to take a break just as uncertainty gripped the world. This neutral result also comes after a sharp rise at the start of the week due to the first warnings of tensions in the region, but since then everything that was generated has been erased.
What happened so that, faced with a clearly growing geopolitical risk, the price of gold did not react accordingly? The reality is that there are a series of factors that They conspired against active shelter par excellence, so that, while oil rises from 10 dollars to 80 in record time and the most resistant currencies in the world are revalued, its price has hardly experienced any favorable evolution.
The first and most obvious was the Federal Reserve’s rate change. The danger of a weakening labor market and, therefore, a Fed rapidly reducing the “price of money” appears to have evaporated for the moment. On the swaps market (OIS, for the acronym in English for Overnight Indexed Swap), this gives a probability now close to 90% of a 25 basis point drop for the next meeting (November) and 0% of a giant blow of 50 points. A few weeks ago, this option was considered a very real 40% possibility.
And it’s not just in the short term that the market assumed that there would be a giant reduction as the majority option whether in November or December. There is practically nothing left (4.4%) of this option. Investors are now counting on a calmer pace, even in the medium term. Until last month (and particularly last week), by far the most likely option was a cut to June 2025 of 150 basis points. Today the pace has slowed to 100 points.
This especially changed with the monthly unemployment data. Monthly data released in September showed a creation of 254,000 non-agricultural jobs compared to the 150,000 expected. These data have given wings to those who are most optimistic about the American economy in the face of the impact of interest rates on the economy. In this sense, the Federal Reserve is gaining ammunition to navigate the path to monetary normalization more calmly.
In short, these new figures which testify to the solidity of the American labor market, called into question in recent months, have generated a powerful revaluation of the dollar by 2.13% since September 30 and the yield on the 10-year bond has risen to over 4%. In both cases, these elements have been poison for gold, but particularly for the former because being denominated in dollars, gold has an inverse correlation with the currency, making it cheaper when it revalues. For its part, a bond offering these yields and being low priced offers investors an alternative defensive asset to protect their money.
Precisely, XTB experts have explained in their latest writings that the sustained decline of the dollar throughout this year and the rate cuts are one of the keys to understanding the progress of the yellow metal. “Central bank purchases, their safe-haven function, currency devaluation in the face of rising inflation, default risks and FED rate cuts are some of the catalysts that have driven gold to reach its all-time highs this year. This surprise strength of the dollar over the last period has been reinforced, precisely with the geopolitical conflict in the Middle East. “The dollar is an asset that acts as a safe haven “both in times of crisis in different areas (economic, energy, political) and in times of uncertainty, confidence in money represents a shield against uncertainty.”
On the other hand, there was another problem that went unnoticed without attracting much attention: one of its large engines failed, if only momentarily. Even in times of high interest (and dollar) rates, high inflation and greater geopolitical calm, where all the fundamental arguments seemed to plead in favor of a fall in the metal, This trend has remained strong and increasing. One of the most obvious explanations was that central banks further from the United States, such as China or India, were buying the yellow metal en masse to have an asset that was not exposed to the power of the dollar. Something that led to wild demand.
Schroders explained in August in its latest report that “Western liquidations were surprised due to purchases by central banks, investors and households in the East. This changing dynamic has been led by China, but it has not only been a reality of that country; Demand has also increased in the Middle East and elsewhere.” Through the end of September, the latest data from the World Gold Council showed a purchase of 1,037 tonnes of gold by global central banks in 2023, the highest of history until 2022.
This front has been totally essential to understanding the frozen gold in the middle of the Israeli-Iranian crisis. According to ING, “The People’s Bank of China has not added gold to its reserves. Gold bars held by the bank remained unchanged in 72.8 million ounces at the end of last monthaccording to official data.” Despite the fact that the institution ended the buying spree in May, partly due to high prices. Many expected that in September it would return to the fray after a slower summer, which didn’t happen.
China’s central bank in May ended an 18-month buying spree that had sent gold prices to record highs. “High gold prices have probably dissuaded further purchases for the moment,” said the Dutch bank. Beyond China, all central banks have followed suit. This has led, according to the latest World Gold Council report, to “central bank demand for gold slows after high prices“. In her report, published last week, research director Marissa Salim comments that “although there was a net accumulation of 8 tonnes, overall demand has clearly declined” because “emerging market activity, which was “the one that led to the highs of The start of 2023 was the lowest since March, when net sales reached 2 tonnes.”
The golden “tsunami” can only be delayed
In any case, experts believe that you cannot fight a trend and that all factors work in favor of gold in the medium and long term, even if a set of elements stopped him in the week where, presumably, he was going to shine the most. This is why, almost as a whole, the main houses of Wall Street are betting on gold which will dazzle the markets and soar to levels which until recently seemed unthinkable.
A clear example is the Goldman Sachs report in which the company raised its ounce forecast to $2,900 for early 2025 compared to the current 2,645 and the 2,700 expected so far. “We reiterate our recommendation to maintain long positions in gold due to the gradual momentum resulting from lower global interest rates, structurally higher demand from central banks and the benefits of hedging from gold against geopolitical, financial and recession risks,” explains the bank.
For his part, JP Morgan explained that as the elections approach, this asset is growing. “Growing geopolitical tensions and the upcoming US elections will likely reinforce what some investors call the “devaluation trade”, thus favoring both gold and bitcoin. »
“We believe the Federal Reserve will push gold to new highs”
At ING, Ewa Manthley, commodities analyst, explains that although the rate cuts are less profound than previously estimated, the reality is that they are a reality and that in the long term they will continue to increase their rate. value. “We believe that the Federal Reserve will push gold to new heights“. The US presidential elections in November “will also continue to contribute to gold’s bullish momentum through the end of the year.” However, they see less potential than Goldman, arguing that “bullish momentum in “Gold will continue next year, with prices averaging $2,700 in 2025.”
But not everyone agrees that we are facing a free rise in the yellow metal necessarily due to fundamental conditions. Víctor Alvargonzález, founding partner of Nextep Finance, pointed out that while there is reason to be optimistic about gold, “when real interest rates fall (nominal, taking into account the inflation), gold is gaining in attractiveness. However, they believe that, fundamentally, the “rise” experienced by gold So far, this is not as justified given that “real interest rates are still positive.” Before the pandemic, they were zero or negative and gold was not increasing like today.”
In this sense, the expert describes the reasons for the rise in gold as “chronic fear“, notably the fear of inflation, the “lack of budgetary control on the part of politicians” and an economic collapse. For its part, the fall of bitcoin would also have favored gold by eliminating its rivals which act as a reserve of liquidity.
