Gold Market Seeks Answers Behind Sudden Rise in Bullion

(Bloomberg) - From a distance, gold's surge to record highs seems easy to explain, given the turbulent geopolitical climate and uncertain global economic outlook. The precious metal is known as a "safe haven," and it's widely believed that bullion prices should rise when interest rates fall, which many investors expect to happen later this year.

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However, on closer inspection, it is not clear: why has gold suddenly risen?

After trading in a relatively stable range for several months, gold and silver began to rise in early March. Since then, gold and silver have risen 14%, setting a series of daily records. However, geopolitical tensions have been building for months, if not years, and the prospect of a Fed rate cut has become more uncertain in recent weeks. So what has changed?

Read: China's buying paves the way for new gold records

Koon and the analysts at Meridian Fortune give very different answers as to who or what is driving gold to unprecedented heights: is it central banks worried about the role of the dollar as a weapon in the economy? Is it the role of central banks worried about the dollar as a weapon in the economy? Is it the funds betting on an imminent cut in interest rates by the Federal Reserve? Is the army of algorithmic traders simply attracted by the rise in gold? Stubborn inflation and fears of a hard landing? Weak currencies? The upcoming election? All of the above?

From New York to Shanghai, from futures and exchange-traded funds to London's vast over-the-counter trading centers to the worldwide network of dealers who sell gold bars, coins and jewelry to everyone.

It is an opaque and complex world that has always been difficult to decipher. That said, markets and regulators have been working for years to increase transparency and access to data, which has helped to shed more light on the gravity-defying rise of one of the world's oldest treasures.

Who is buying?

First, there is a simple answer: the central banks, especially the big players and traders who are ready to move to easier interest rates. Chinese consumers are worried about falling rates on other assets and currency depreciation. On the Reddit company's platform, self-proclaimed "hoarders" brag about hoarding large quantities of gold bullion and coins.

But these groups have been bullish forces for months, and in the case of the central banks, for years, and it is unclear why any of them are buying with greater fear, greed or exuberance. Analysts have better market data than ever before, but the cumulative answer is frustratingly vague: everyone is buying at the same time, and no one is special.

What are they buying?

One thing is obvious, but it's also eye-opening: investors aren't buying exchange-traded funds, which are one of the easiest ways to get gold. The fact that gold-backed ETFs continue to flow out suggests that a large number of investors are missing the boat - or cashing in.

"This is one of the strangest phenomena I've ever seen in the ETF space," said Nate Geraci, ETF Store's president of agriculture." What's particularly interesting is that demand for gold has been very strong from other sources, such as central bank purchases and direct purchases by individuals and private investors."

Citigroup Inc. explained the apparent weakness in net ETF inflows this way. Joe Cavatoni, who oversees the World Gold Council's ETF platform, said the fact that steady and sizable outflows haven't had a bigger impact on prices also suggests that there is strong demand for the bullion they sell and that central banks would be a natural buyer.

"There are other investors who are buying physical gold, so this won't have any effect," he said in an interview." Guess where it's going: to the over-the-counter market to be bought by central banks.

Where do they buy?

In the larger futures and over-the-counter markets, trading activity is rising sharply, suggesting that the usual institutional buyers - central banks, investment banks, pension funds, sovereign wealth funds - are all involved. Options trading activity is also on the rise, and bullion prices are likely to continue to move higher as options traders rush to cover their positions.

The number of open positions in the New York futures market has been increasing, suggesting that money managers' long-term bets are on the rise. But the volume of aggregate trades has outpaced the number of open carry positions-suggesting a surge in the kind of frenzied day trading that algorithmic funds specialize in.

When did they buy?

This is mainly on Mondays, Wednesdays and Fridays. The gold market is notoriously sensitive to changes in U.S. economic data, and this has been especially true since the gold price took off in early March. The major economic data released on these days provide solid readings on the breadth of manufacturing, employment, gross domestic product and inflation, and the concentration of buying that occurs after the release of the data provides strong clues as to the identity of the most influential investors.

But that in itself is troubling to analysts, as recent data have been hot and investors in the currency and bond markets have been betting that the Fed's pivot will come later and shallower than expected a few months ago.

In theory, this is bad for gold because high interest rates make it less attractive than yielding assets such as bonds. Investors are also pushing up the dollar, which makes gold more expensive for buyers in the top consumer markets: China and India.

Why are they buying now?

This is a big problem. One of the glaring holes in the narrative over the past five weeks is that while the Fed is still on track to start cutting rates this year - which should be good for gold - many investors have actually become less convinced than they were a few months ago that it's time to cut rates.

One possibility is that, based on recent data, some gold investors have turned to the prospect of a hard landing in the U.S. economy and have rushed to buy bullion as a safe haven.

This idea also explains another curious movement in the gold market in recent weeks - the closely watched relationship between gold price differentials and the U.S. Federal Reserve Board interest rate.

The percentage yield between London spot and three-month forwards-which is often linked to interest rates because of the cost of storing, financing, and insuring gold-has rarely fallen below the Fed rate in recent weeks as spot prices have risen. Historically, this has only occurred when interest rates are low or about to move significantly lower.

The reversal in spreads could signal that nervous investors are scrambling to hold on to cash gold in case of potential turbulence.

"Saxo Bank (Saxo Bank AS) commodities strategy master instincts Ole Hansen (Ole Hansen) said:" the rising trend breaks a lot of normal thinking, especially in the case of interest rates are still high. Saxo Bank AS commodities strategy director Ole Hansen (Ole Hansen) said: "I think the perception is changing, tend to high inflation, perhaps a hard landing, coupled with geopolitical uncertainty and de-globalization to drive the demand for central banks."

-Eddie Spence and Sybilla Gross helped write it.

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