Speculative froth departing gold as China tightens trading conditions

Arguably the physical buying interest from central banks as well as Chinese retail purchases underpinning this market could count as some of the highest quality in that neither is likely to return to the market irrespective of the price action.

The same cannot be said of the more recent speculative flows, which by their nature, are arguably agnostic to the asset itself … it's a pure exercise in making money. Long or short … gold or soda ash futures … who cares. Like 12 year olds high on e-numbers, the futures market can be a riot of activity, rife with rumour and everyone keen to jump on the latest fad. 

If you marked the 'new gold paradigm' to 1st March 2024 before the yellow metal went near vertical … and showed little regard for neither financial market indicators nor geopolitics … then arguably the gold floor is comfortably set at around $2060. That said, physical buyers who missed the rally will likely jump in as the market retraces, setting a much higher floor. The charts offer some guidance – with the 100 dma at $2250 and this will likely be the first port of call … will it hold ? … that depends upon the level of long liquidation coming out of China, because that seems to be the driving force just now. 

So China has tightened trading conditions as a safeguard in a gold market that it clearly deems to be too hot. 

On April 8th, the Shanghai Gold Exchange (SGE) advised gold margin requirements would be tightened from 10% to 12%, and the daily price limit would be adjusted from 9% to 11%. On April 12th, further adjustments were made. Starting from the close of clearing on April 15th, the margin requirement for gold contracts was increased from CNY 45,000 per lot to CNY 51,000 per lot. Similar adjustments were made to silver after it hit “limit up” on April 8th.

More importantly, on April 10th, the Shanghai Futures Exchange (SHFE or Shiffy) similarly announced the reduction of trading limits for gold futures, with a maximum number of contracts for intraday gold trading set at 2,800 lots. On April 16th, the SHFE further adjusted the daily price limit for gold and silver futures to 8%, while increasing the hedging trading margin requirement to 9% and the speculative trading margin requirement to 10%.

These changes provide significant speed bumps on the motorway that is gold trading. It is a passion-killer. It follows that Chinese speculators would look elsewhere.

Gold saw the largest price decline yesterday in 14 months followed by a further significant decline today with large volumes being traded in Shiffy. 

There is a sense that the speculative froth is leaving the market and as it declines, gold will re-engage with its core physical buyers who have been left behind. If you want to know where that floor is then the charts will give you a view – and if not, Indian bargain-hunting is normally a great bell-wether. In short, this is a healthy correction for gold. 

Rumours that the Chinese government would be building significant stockpiles of nickel sent prices up by a massive 6.5% on Shiffy, just as gold cratered … a coincidence ? I think not. 

Meanwhile domestic Chinese gold ETF buying, normally the preserve of a footnote, has accelerated with 28.5 tonnes of gold buying in the last 4 weeks. So as speculators depart stage left, it appears that 'quality' gold investment is re-entering stage right. So grounds for encouragement.

By Ross Norman

Source: Metals Daily

Asia gold: Dealers grapple as sky-high rates erode demand in key hubs

Physical gold demand in Asia dwindled on the back of sky-high prices as consumers abstained from making fresh purchases, forcing dealers to offer deep discounts last seen a year earlier in India and lower premiums in China this week.

“Gold is behaving in a characteristically price elastic way which is to say consumers are responding to elevated prices by scaling back purchases rather than chasing the market higher,” said Ross Norman, an independent analyst based in London.

In top consumer China, gold premiums slipped to $15-$25 per ounce over benchmark prices, from $20-$36 a week earlier. Premiums were at their lowest levels since July this week, as per Reuters records.

Bernard Sin, regional director of Greater China at MKS PAMP, however, said there is still investor interest in gold as a safe haven due to concerns about the country’s uneven economic recovery.

“Despite this, the People’s Bank of China is likely to maintain its current policy of issuing conditional import quotas unless the RMB exchange rate exhibits excessive volatility.”

In India, the world’s second-largest gold consumer, domestic prices rose to a record 66,356 rupees per 10 grams on March 8.

Asia gold: India premiums hit 4-month highs, jewellers stock up for weddings

“Jewellery stores are tumbleweeds these days. People think prices won’t stay this high forever,” said Harshad Ajmera, a gold wholesaler in Kolkata.

Indian dealers offered discounts of about $36 an ounce over official domestic prices - inclusive of 15% import and 3% sales levies, the highest since March 2023 - versus last week’s $30 discount.

Since retail buyers are exchanging old jewellery for new, jewellers have ample scrap supplies and do not need to buy from banks, said a Mumbai-based bullion dealer with a private bank.

In Singapore, bullion was sold at anywhere between at par to $2.25 premiums, while dealers charged premiums of between $1-$2.5 in Hong Kong.

There is more selling than buying, because most consumers are taking profit as prices are near all-time highs, said Brian Lan at Singapore dealer GoldSilver Central.

In Japan, dealers sold gold at par to $0.5 premiums.

By Reuters

Source: Brecorder

Gold at $3,000 and oil at $100 by 2025? Citi analysts don’t rule it out

There’s an off chance that gold prices could soar to $3,000 per ounce, and oil to $100 per barrel within the next 12 to 18 months, according to Citi.

Central bank aggressive purchases, stagflation, and a global recession are catalysts that could drive the price of the yellow metal almost 50% higher, Citi analyst said.

Gold prices could soar to $3,000 per ounce, and oil to $100 per barrel within the next 12 to 18 months subject to any one of three possible catalysts, according to Citi.

Gold, which is currently trading at $2,016, could surge by about 50%, if central banks sharply ramp up purchases of the yellow metal, a possible stagflation, or in case of a deep global recession, Aakash Doshi, Citi’s North America head of commodities research, told CNBC.

Central bank’s gold rush

“The most likely wildcard path to $3,000/oz gold is a rapid acceleration of an existing but slow-moving trend: de-dollarization across Emerging Markets central banks that in turn leads to a crisis of confidence in the U.S. dollar,” Citi analysts including Doshi wrote in a recent note.

That could double central bank’s gold purchases, challenging jewelry consumption as the largest driver of gold demand, Doshi elaborated. 

Central banks’ gold purchases have “accelerated to record levels” in recent years, as they seek to diversify reserves and reduce credit risk, Citi said. China and Russian central banks are leading gold purchases, with India, Turkey, and Brazil, also increasing bullion buying.

The world’s central banks have sustained two successive years of more than 1,000 tons of net gold purchases, the World Gold Council reported in January.

“If that goes again [to] double very quickly to 2,000 tons, we think that would be actually very bullish for gold,” Doshi told CNBC via phone.

A global recession?

Another trigger that could drive gold to $3,000 would be a “deep global recession” that could spur the U.S. Federal Reserves to cut rates rapidly.

“That means the brakes have been cut, not to 3%, but to 1% or lower - that will take us to $3,000,” Doshi said, noting that this is a low probability scenario.

Gold prices tend to share an inverse relationship with interest rates. As interest rates dip, gold becomes more appealing compared to fixed-income assets such as bonds, which would yield weaker returns in a low interest rate environment. 

The Fed benchmark interest rate has been between 5.25% and 5.5% since July 2023, the highest since January 2001 when it shot to 6% following the dot-com bubble burst. Markets expect the Fed to cut rates in May or June.

Stagflation — an increasing inflation rate, a slowing economic growth and rising unemployment — could be another trigger, though Doshi said there’s a “very low probability” of such a scenario.

Gold is perceived as a safe haven and tends to perform well in periods of economic uncertainty when investors move away from the riskier assets such as equities.

These three potential triggers aside, Citi maintains that their base case for bullion is $2,150 in the second half of 2024, and the price of gold to average a little over $2,000 in the first half. A new record could be reached towards the end of 2024, Doshi added.

Oil at $100?

Another wildcard scenario highlighted in Citi’s report was for oil prices to hit triple digits again.

The catalysts for oil to hit $100 per barrel include higher geopolitical risks, deeper OPEC+ cuts and supply disruptions from key oil producing regions, Doshi said. 

The ongoing Israel-Hamas war has not hit oil production or exports, with the only significant impact being the Houthi attacks from Yemen on oil tankers and other ships traversing the Red Sea.

Major oil producer Iraq has been impacted by the conflict and any further escalation could hurt other major OPEC+ suppliers in the region, Citi said.

Recent developments show that tensions have been rising on the border between Israel and Lebanon, raising fears that the war in Gaza could spread elsewhere in the Middle East.

Doshi said Iraq, Iran, Libya, Nigeria and Venezuela are vulnerable to supply disruptions, with steeper U.S. sanctions policy on Iran and Venezuela potentially on the cards. 

Other geopolitical risks such as Russian oil supplies, should Ukraine attack Russian refineries with drones, cannot be ruled out, Citi’s analysts wrote. Doshi maintained that their base case for oil stands at around $75 per barrel for the year.

Global benchmark Brent’s April futures were trading at $83.56 a barrel, while the U.S. West Texas Intermediate March futures stood at $79.13 per barrel.

By Lee Ying Shan

Source: CNBC

Fed rate cuts and the gold price forecast for 202

Key takeaways:

*Gold prices touched an all-time high of $2,135.39/oz in December 2023, driven largely by a weak U.S. dollar and expectations the Fed will begin lowering rates.

*Fed interest rate cuts and falling U.S. real yields will once again become the key drivers behind gold prices in 2024.

*Gold prices are expected to dip in the near term before climbing to new highs later in the year, with a forecasted peak of $2,300/oz in 2025.

Gold prices surged in the last few months of 2023 after a powerful rally was sparked by central bank purchasing and mounting investor concern over the Israel–Hamas and Russia–Ukraine conflicts. A falling U.S. dollar and expectations of Federal Reserve (Fed) rate cuts further boosted bullion prices, which hit a record high of $2,135.39/oz in December.

After a hiking cycle that pushed the Fed funds rate to its highest in more than 22 years, policymakers on the Federal Open Market Committee (FOMC) have indicated at least three rate cuts in 2024, as inflation eases from the 40-year highs seen in mid-2022. With gold prices hovering around $2,000/oz, is another bullish run expected for the precious metal as rates begin to fall?

“Commodities are unlikely to benefit from core inflation in 2024. Inflation should fall to under 3%, so that, along with properly timing the business cycle, are the two conditions needed to initiate long positions, making the outlook for the sector very tactical in 2024,” said Natasha Kaneva, Head of Global Commodities Strategy at J.P. Morgan. “Across commodities, for the second consecutive year, the only structural bullish call we hold is for gold and silver.”

Economic and geopolitical uncertainty tend to be positive drivers for gold, which is widely seen as a safe-haven asset due to its ability to remain a reliable store of value. It has low correlation with other asset classes, so can act as insurance during falling markets and times of geopolitical stress. A weaker U.S. dollar and lower U.S. interest rates also increase the appeal of non-yielding bullion.

Anticipation has played a key role in sparking the rally in gold’s price, as it is influenced by market expectations of future Fed policy.

“Across all metals, we have the highest conviction on a bullish medium-term forecast for both gold and silver over the course of 2024 and into the first half of 2025, though timing an entry will continue to be critical,” said Gregory Shearer, Head of Base and Precious Metals Strategy at J.P. Morgan.

“At the moment, gold still appears quite rich relative to underlying rates and foreign exchange (FX) fundamentals, and still looks vulnerable to another modest retreat in the near-term, as Fed rate cut expectations are now running earlier than our forecasts,” Shearer added.

But any retracement in the coming months could provide investors with an opportunity to begin positioning for a breakout rally commencing around mid-2024, as U.S. GDP growth slows and expectations of an imminent Fed cutting cycle rise.

Will gold prices hit another all-time high?

Gold prices will peak at $2,300/oz in 2025, according to J.P. Morgan Research estimates. This prediction assumes a Fed cutting cycle initially delivering 125 basis points (bp) of cuts over the second half of 2024, pushing gold prices to new nominal highs.

Gold price predictions are based on Fed official forecasts, which see core inflation moderating to 2.4% in 2024 and 2.2% in 2025, before returning to the 2% target in 2026.

By the second quarter of 2024, J.P. Morgan economists forecast U.S. growth will slow to 0.5% quarter-on-quarter. This should prompt the Fed to start cutting rates in June, ultimately delivering 125 bp of cuts in the latter half of the year to avoid a recession. 

Based on this underlying economic outlook, U.S. 10-year nominal yields are forecasted to fall 30 bp from a 3.95% forecast at the end of the first quarter, targeting 3.65% by the end of 2024. This would pull U.S. 10-year real yields lower by the same magnitude, from 1.75% to 1.45% over the same time frame.

“We think over this period, the Fed cutting cycle and falling U.S. real yields will once again become the mono-driver behind gold’s breakout rally later in 2024. Gold’s inverse relationship to real yields has historically been weaker over Fed hiking cycles, before strengthening again as yields fall over a transition into a cutting cycle,” Shearer said.

This should ultimately drive gold prices to new nominal highs in the second half of 2024 (averaging $2,175/oz in the fourth quarter) and even higher in 2025 (quarterly average peak of $2,300/oz in the third quarter).

“The Fed cutting cycle and falling U.S. real yields will once again become the mono-driver behind gold’s breakout rally later in 2024.”

Gregory Shearer

Head of Base and Precious Metals Strategy, J.P. Morgan

Central bank buying and ETF flows to support gold demand in 2024 

In addition to imminent rate cuts and rising geopolitical tensions, central banks were a major driver of gold prices in 2023 and will likely continue to be so in 2024.

Led by China, central banks have purchased more than a net 800 tonnes of gold in the first three quarters of 2023. J.P. Morgan Research estimates global central bank purchases for the year will hit 950 tonnes, with China remaining a significant steady buyer. This will exceed the amount purchased over the same period in 2022, which resulted in record demand.

“There is still scope for boosted reserves at some central banks as institutions look to diversify reserve assets, so purchasing is likely to remain structurally elevated compared with the late 2010s,” Shearer noted.

Gold as a percentage of total reserve holding across select central banks 

Along with central bank interest, increased investor appetite in the physical gold market should also be a major flow contributor to any 2024 gold rally. As of the end of 2023, managed money in net long positions — where more investors expect the price of gold to rise rather than fall — only screened at around 6/10 on a standardized scale, with 10 being the net longest positioning since 2018.

This means there is still a lot of capacity for investors, through the purchase of gold either on an exchange or via an exchange-traded fund (ETF), to increase their long positions.

Total ETF holdings in gold have fallen steadily since mid-2022, so a re-lengthening of investor positioning (exchange and ETF) triggered by the onset of a cutting cycle is expected to be positive for bullion and supportive of a rally in prices in the second half of 2024.

“As rates eventually come down, we would expect recent ETF outflows to reverse with a return to retail-led ETF inflows boosting gold investor demand too, strengthening a move higher in prices,” Shearer said. “Continued robust central bank purchases, along with boosted physical demand on price dips will likely remain a significant support to prices over the final twists and turns of the Fed cycle.”

By J.P. Morgan

Source: J.P. Morgan

First $14M cross-border e-CNY gold purchase completed in Shanghai

The transaction was facilitated by the Shanghai Financial Exchange International Board.

The first-ever cross-border settlement for precious metals using the digital yuan central bank digital currency (CBDC), also known as the e-CNY, was recorded on Dec. 20.

According to local news reports, the Bank of China’s Shanghai branch successfully transferred a 100 million yuan ($14 million) e-CNY CBDC settlement received overseas for gold via the Shanghai Financial Exchange International Board. 

“The account will contribute financial strength to support Shanghai’s in-depth implementation of the free trade pilot zone promotion strategy and promote the quality and upgrading of the international trade center,” a spokesperson for the Bank of China wrote. 

Bank of China Shanghai is currently one of the lead supporters of digital yuan pilot testing and recently facilitated the import of iron ore to China via the CBDC. The firm also partners with foreign institutions, such as France’s BNP Paribas, to develop the digital yuan.

Chinese President Xi Jinping officially praised, for better or for worse, the importance of CBDCs in cross-border trade during an address to the July 2023 Shanghai Cooperation Organisation Summit. Since then, various foreign banks have joined China’s ongoing CBDC trials, while Singapore announced that it would allow Chinese tourists to spend digital yuan inside the island country during their trips. On Dec. 1, China signed a $400 million memorandum on CBDC cooperation with the United Arab Emirates. 

On Dec. 19, the latest update for the official digital yuan app was released. The version allows users to create a digital yuan wallet using their phone number, disable their wallet in case their phone is lost, and reset their password and private keys. Users can also bind their personal bank accounts and debit cards to purchase digital yuan in-wallet.

By Zhiyuan Sun

Source: Cointelegraph