Gold Prices in the Vortex of American, Chinese and Middle Eastern Interests
In recent months, global gold prices have experienced significant tug-of-war due to the policies of two large countries, China and the United States. On the one hand, China, through its central bank, continues to encourage demand for gold, while on the other hand, the United States suppresses gold prices with its high interest rate policy.
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In the midst of this competition, the role of geopolitical tensions in the Middle East is also very large in pushing up gold prices. Referring to Refinitiv data, the price of gold closed at US$ 2,343 per troy ounce, up 0.18% in trading last Thursday. This strengthening is good news after gold fell 0.93% on the previous Wednesday.
However, gold weakened today, Friday (31/5/2024), the price of gold weakened 0.07% to US$ 2,341.41 per troy ounce.
China Drives Gold Prices
Demand for gold from global central banks has increased over the past two years, with countries diversifying their foreign currency reserves.
According to World Gold Council data, the official gold reserves of the Swiss central bank (Swiss National Bank/SNB) have increased by more than 1,000 tons in the last two years.
UBS expects China to continue to dominate the global gold market, although the latest data from the People's Bank of China (PBoC) shows a decline in gold purchases. However, trade data from Switzerland indicates that China continues to purchase gold significantly.
UBS analysts also said that geopolitical uncertainty, such as the approaching US election, wars in the Middle East and Ukraine, and increasing US-China trade tensions, will continue to drive safe-haven demand for gold.
However, physically backed gold exchange-traded funds (ETFs) saw net outflows of 11.3 metric tons last week, signaling fluctuations in the global gold market.
China's central bank (PBoC) bought up 224.88 tonnes of gold in 2023. This amount is much greater than in 2022 which was recorded at 62.2 tonnes.
The economic slowdown and property crisis have made China's economy one of the reasons for the massive purchase of gold by China's central bank. Gold is a safe asset that can be used as a hedge during economic and political uncertainty.
Not only the central bank, Chinese investors also bought up gold on a large scale for jewelry and coins for investment.
Chinese consumers have even replaced India as the largest gold wholesaler in the world. They bought 603 tons of gold in 2023, up 10% compared to 2022. Gold purchases by Indian consumers fell 6% to 562.3 tons in 2023.
United States Pressures Gold Prices
On the other hand, the United States, through its high interest rate policy, is trying to suppress gold prices. The attractive yield on 10-year US debt securities which is considered a risk-free asset reaches 4.558%
This condition encourages investors to switch from gold to US debt securities which provide higher yields. According to Reuters, the high yield on US debt securities was caused by US economic growth remaining strong, raising concerns that the Federal Reserve (The FEd) might slow down monetary policy easing too quickly, which could trigger an inflationary rebound.
In addition, data on the US dollar index against a basket of currencies from various countries (DXY) showed a strengthening of 3.38% since the beginning of the year to 104.837
The strength of the US dollar can weaken the price of gold because the price of gold in dollars will feel more expensive for investors who use other currencies, which can reduce demand and push the price of gold down.
A strengthening US dollar often makes gold less attractive to international investors who prefer more stable and profitable dollar-denominated assets.
Based on this, even though the United States and China are currently in a strong tug of war regarding gold prices, various external factors still play an important role in determining the direction of gold price movements in the future.
Another factor that has a big influence on gold prices is geopolitical uncertainty in the Middle East, ranging from the Israel-Hamas war to Israel-Iran tensions.
Gold is a safe asset that is sought after when political shocks occur so that demand soars and the price of gold flies. Geopolitical tensions even came into play
Gold prices flew 1.56% following the heating up of the Israel vs Hamas war in trading Monday (9/10/2023) after the Israel-Hamas war erupted the previous Saturday.
Tensions in the Middle East increased after Iran bombarded Israel with missiles on Saturday night last week local time. Unmitigated, Tehran reportedly shot 300 missiles and drones on April 13 2024.
The price of gold also accelerated and continued to set new records during the Middle East war. During April, gold prices flew 2.38%. When the Israel-Hamas war erupted in October 2023, gold for that month flew 7.3%.
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