Recent weeks have seen gold prices swing wildly, and many market participants and analysts have been trying to figure out the forces behind this high volatility that isn’t typical of how the gold market has previously behaved. Major concerns arose after gold climbed to a record price of $5,594 an ounce, only to plummet by almost 10% the following day on Jan. 30. From that day, bullion has experienced very high volatility and it has been a struggle for the metal to stay above the $5,000 per ounce price.
Scott Bessent, the United States Treasury Secretary, pointed out that these wild swings are due to “unruly” trading activity in China, and many analysts are also pointing to China as the cause of this volatility.
Gold and other “safe haven” assets have rallied over several months, driven by factors like the shift in the direction of interest rates in the U.S., geopolitical turmoil and economic uncertainty in major economies. However, a growing number of analysts are citing institutional and retail investment activity in China as contributing disproportionately to the recent volatility experienced in the market for gold.
While speaking to Fox News, Bessent categorically described what is happening in China as a speculative blow-off in the classic sense because many trading platforms have had to go as far as tightening margin requirements in response to what is happening on gold trading desks.
There has been a steep rise on trading of gold ETFs and futures in China, prompting repeated hikes to margin requirements in the country. This hasn’t stemmed the increase in trading activity, and that has resulted in the current choppy trading witnessed in the gold market.
MKS Pamp’s research head Nicky Shiels says China has played a dominant role in influencing the price of gold during this recent surge. She adds that the country’s push to de-dollarize has resulted in the country buying huge amounts of gold on a monthly basis for 15 straight months, and that such purchases are unlikely to end soon.
Estimates by the Treasury Department in the U.S. now put China’s gold holdings at approximately 2,300 tons as the country scales back its acquisition of U.S. treasuries.
In addition to these outsized central bank purchases in China, Chinese investors have also increased their trading activities through gold-backed ETFs and futures contracts. This increased activity coincides with depressed prices in the real estate industry and low returns on cash deposits held in banks. Investors have therefore pivoted to the gold market as they seek better returns, and that is creating a speculative bubble in the gold market.
This is ironic, because gold has traditionally acted as a safe haven that helps investors hedge their portfolios against risks in other asset classes. The coming weeks and months are going to determine whether these new dynamics in the market persist or fade away. Stakeholders like Collective Mining Ltd. (NYSE American: CNL) (TSX: CNL) will be watching.
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