https://www.afr. com/markets/commodities/why-a-surging-gold-price-could-signal-more-sinister-times-ahead-20240828-p5k5xi
Why a surging gold price could signal ‘more sinister’ times ahead
Alex GluyasMarkets reporter
Aug 28, 2024 – 3.25pm
The latest surge in the gold price to fresh highs, against a backdrop of rallying equities and bonds, is said to have created a dangerous cocktail for complacent financial markets.
The warning from ING follows gold’s climb to more than $US2500 an ounce this week after US Federal Reserve chairman Jerome Powell confirmed the time to start cutting interest rates had arrived.
The promise of some rate relief in the world’s largest economy unleashed a rally across equity and bond markets, sending Bloomberg’s benchmark for the 60:40 portfolio (60 per cent stocks, 40 per cent bonds) to a record.
Gold prices have surged by more than a fifth this year, and analysts are expecting further gains. Jim Rice
Markets continue to price in a goldilocks scenario where inflation remains contained, and the Fed eases interest rates just enough to prevent a significant rise in the jobless rate and a US recession.
And while that has supercharged a rally in the sharemarket, it has also boosted gold, long considered a store of value, from a decline in Treasury yields and the US dollar.
But strategists say investors need to look further into what’s really driving gold prices higher.
“Everything is up, that can’t last,” said ING’s regional head of Americas research, Padhraic Garvey, in a report to clients.
“A new high in the gold price, in hindsight, may be looked back as a warning sign that we missed. The rise in the gold price against that backdrop could well be a precursor for more sinister times on financial markets where prices instead go down.”
While bubbling geopolitical tension around the world has only added fuel to gold’s safe-haven appeal, Mr Garvey pointed to a “quiet trade” in the background where countries are building their gold reserves.
While that has been a popular move in countries suffering high inflation such as Turkey and Argentina, ING noted that China and Russia also had been increasing their gold holdings while reducing their US dollar exposure.
Covert buying
The bank drew comparisons to when Russia liquidated the bulk of its Treasury holdings before invading Ukraine.
“Both [China and Russia] have an interest in covertly doing whatever might undermine the dollar, and at the margin this is one,” Mr Garvey said. “US Treasuries are still well demanded, but we need to continue to monitor this space.”
China’s central bank re-directed its vast foreign exchange reserves away from US Treasuries and into gold as part of a broader strategy to reduce its dependence on the greenback as a reserve currency.
That was a key driver behind gold’s surge earlier this year, despite markets paring rate cuts by the Fed, which boosted the US dollar. The precious metal and the greenback typically have an inverse relationship.
“There’s been a clear shift in the way China manages its reserves, and it’s been primarily driven by de-dollarisation,” said senior commodity strategist at ANZ Daniel Hynes.
“China’s continued push to have a financial system that is less reliant on the US dollar has already been seen through its efforts to incorporate renminbi in more transactions, but in terms of its reserves, that strong accumulation of gold has been a key benefit of this de-dollarisation strategy.”
The US has historically used the financial system to exert its influence on the world, which runs contrary to China’s interests, particularly if President Xi Jinping follows through with his desire to unify Taiwan with the mainland.
The US maintaining its leverage over China is also particularly important given the possibility of another trade war should Donald Trump return to the White House as president.
“If you look at what happened with Russia after it invaded Ukraine, accounts and assets got frozen, and they were taken out of SWIFT [the banking system],” said Kyle Rodda, senior analyst at Capital.com.
“China doesn’t want to be exposed to that level of risk where if anything goes wrong in its relationship with the US, they can’t access their assets.”
(20min delay)