The last week has had quite a bit of drama on the geopolitical arena. On top of that, there has been some growing concern about the macro trends. For one, there were reports that analysts were starting to fret that European equities have strayed into overbought territory. Meanwhile US consumer data under performed, which left worried that the largest economy in the world might not be as strong as initially assumed.
All of this leaves markets looking at a very uncertain horizon, which seems to be the catalyst behind supporting recent commodity price improvements. Gold has been hitting record high after record high, with analysts saying it could hit as high as $3,500/oz by the end of the year. In the fraught environment, it seems investors are doubling down on gold.
The Recovery To Push XAUUSD prices
Over the last week, several major mining companies reported earnings, which is useful to get some additional insight into the dynamics of the gold market. Several expressed optimism that demand would improve this year, pointing to green shoots in China. While this would largely support industrial commodities such as copper, it could also help reignite demand for gold as well.
But there might be a horizon to the gains. With a broad consensus that the trajectory for gold is upward in the medium to long term, there seems to be a bit of a shift in the industry. Large miners such as BHP were on a buying blitz over the last year, purchasing smaller competitors to replace their depleting reserves. But now BHP at least has said they are done with that, and are looking to expand organically. That means there is an intention to bring new ore production online, increasing productivity.
The Price Falls Out of the Ballance
XAUUSD prices had been relatively depressed over the years around the pandemic, as investors piled into growth assets, such as stocks. That meant there was a slowing down in exploration and bringing new production online. It takes years to generate a significant new mine for gold, which means supply of the yellow metal has become constricted just as demand is starting to increase.
However, that situation won’t be permanent, and the comments from BHP illustrate that major miners are shifting towards increasing production as opposed to consolidating existing reserves. It would likely take time, but higher production down the line could end up putting a cap or eventually downward pressure on gold.
Rising to the Peak
In the meantime, however, investors are looking at safe haven demand and the potential for lower interest rates that could push gold towards a peak in the medium term. The latest economic data suggesting that US consumers aren’t as resilient as initially thought could provide additional headwinds for gold.
If the US economy underperforms, then the Fed would be in a better position to ease rates, which typically support XAUUSD prices. A surprise downturn in the American economy could also lead investors to bulk up on gold as a safe haven protection, as well. With earnings season over, gold traders could be keenly focused on how the US economy fairs, particularly if inflation remains high going into the spring.