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Gold is Defying Traditional Relationships as Demand Grows

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Yellow Gold Ingot Bar with U.S. Currency

Yellow Gold Ingot Bar with U.S. Currency

Mark Johnson/Getty Images/iStockphoto

Debbie Carlson, for CME Group

At a Glance:

  • Strong demand out of Asia and in the over-the-counter markets helps lift prices to all-time highs
  • More retail traders are turning to Micro Gold futures contracts, where trading volume reached a record

Gold prices have been on a tear in 2024. Having hit all-time nominal price highs in May, the metal continues to defy traditional market correlations with the U.S. dollar and equity markets.

The response from some market participants has fueled increased transactions of physical gold like bars and coins. Central bank buying remains strong and demand from China continues unabated. Meanwhile, investors in the U.S. are increasing their physical purchases, sometimes at popular retail chains.

Terry Hanlon, president of Dillion Gage, a metals trading firm, wholesaler and refiner, says he’s seeing busy activity from both buyers and sellers with prices elevated. Buyers are citing geopolitical worries, stubborn inflation and the other usual reasons that attract people to gold. Strong gold prices themselves attract some buyers, while sellers are offloading product they bought when values were much lower.

“High prices always attract people; people always buy it on the run up more than they do on the run down,” Hanlon says.

Buyers also turned to an unusual place for gold, Costco Wholesale. The retailer started carrying gold bars on occasion, mostly available through its website, and usually limited purchases to two bars. The retailer said in its quarterly earnings that the bars would often sell out quickly after listing online. Wells Fargo estimates that Costco likely sells between $100 million to $200 million in gold monthly.

The World Gold Council’s recently released data on gold demand trends shows healthy over-the-counter gold buying, enough to offset outflows from exchange-traded funds. In 2024’s first quarter, the gold industry group said demand rose 3% year-over-year to 1,238 metric tons, the strongest first quarter since 2016.

Central bank buying rose 1% to 289.7 tons in the first quarter, while technology and electronics demand increased 10% to 78.6 tons and 13% to 64.4 tons, respectively. The WGC cites the boom in artificial intelligence boosted demand in the electronics sector. But the surge in over-the-counter demand stood out in the early 2024, with OTC buying up 220% to 136.4 tons.

“OTC buying by investors, while opaque, is reflected in the pace and scale of the price rise. CME net managed money positions, which can be used as a proxy, rose by 91 tons in Q1,” the group said in its report.

Strong Chinese Demand

Ross Norman, a former gold dealer and CEO of Metals Daily, a London-based news and information site, says along with central bank buying and futures-market activity, he believes more of the gold buying in the first quarter came from eastern regions as he noted lackluster physical buying in European markets.

Norman cited strong Chinese demand, with Chinese customs data showing a 34% increase on metal purchases in the first three months of the year over 2023. He says premiums in Shanghai are very high at around $48 per ounce, indicating strong demand.

Traditional buyers of physical gold in China are usually older generations, but Millennials and Gen Z are also snapping up gold in the form of “gold beans,” pea-sized gold pieces weighing about a gram, making it affordable.

“Literally the Chinese stock markets lost about a trillion dollars since its peak in 2021. It’s got a commercial real estate problem and the shadow banking problem. So gold remains one of the very few things out there with value,” he says.

Discovering Prices

Futures market participants are also increasingly active amidst higher volatility. CME Group Gold futures volume in 2024 was up 7% versus the same timeframe in 2023, according to CME Group.

Some retail traders interested in speculating on price or concerned with volatility are turning to smaller contracts – Micro Gold futures – which can be purchased with a lower initial capital investment. As of late May, year-to-date average daily trading volume (ADV) for Micro Gold futures was up 43% compared to a year earlier, and sitting at its highest ADV since inception.

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“As we’ve seen rising prices and economic uncertainty continues, retail traders are increasingly using Micro Gold to express their view on the market,” says Thomas Hart, Senior Director of Metals Products at CME Group. “They’re drawn to the deep liquidity, round the clock market availability and smaller notional size.”

“If you’re holding the proper amount of metal versus the contract, and you’re short futures and you’re long the product. So if it goes down you make money on your gold futures position, and if gold prices go up, you make money on the product,” says Peter Thomas, chairman of precious-metals dealer Ausecure, and a veteran metals trader. “If you want to be neutral, futures do a great job for that.”

Defying the Dollar and Equities

The yellow metal’s big moves have many long-time gold watchers perplexed as the metal is rallying despite economic conditions that should cause it to lag: equity-market strength, a muscular U.S. dollar and reduced expectations for any rate cuts soon from the Federal Reserve.

For gold prices to be strong alongside equities is unusual. Higher stock prices usually mean a risk-on environment, whereas gold demand often picks up when investors seek a safe haven. Through late May, front-month Gold futures prices were up 17% year-to-date, while the S&P 500 was up about 12%.

The dollar is stronger because the Fed is maintaining a tight monetary policy. Gold is dollar-denominated, so usually the greenback and the shiny metal move in opposite directions, all things being equal. Furthermore, the yield on the U.S. 10-year Treasury note has hovered around 4.5% this year, so there’s an opportunity cost to own gold since the yellow metal pays no coupon, unlike fixed income.

Ausecure’s Thomas notes the historic nature of the current gold market conditions. “It is absolutely counterintuitive of everything I’ve ever seen in a rally,” he says.

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