[Why&Next] Gold Prices Rebound After Weakness Due to War... China Sweeps Up Gold for 10 Consecutive Months

Gold Prices Rebound Amid Israel-Palestine War
Expectations of US Tightening Easing Weigh on Strong Dollar
Attention on Whether Gold Prices, Pressured by Dollar, Will Continue to Rise
However, Uncertainties Remain Over War and US Monetary Policy

Gold prices, which had been on a decline for some time due to a strong dollar, are rebounding amid the Israel-Palestine war. As concerns over an economic recession grow due to the war's aftermath, demand for safe-haven assets is increasing. Additionally, expectations that the U.S. tightening stance may ease are gradually rising, suggesting that gold prices are likely to continue their upward trend for the time being. However, some analyses caution that since the U.S. high interest rate policy and strong dollar have not been completely broken yet, investors should be careful when investing in gold.

According to the New York Mercantile Exchange on the 12th, the December gold contract price has been rising sharply, approaching $1,900 per ounce. Gold prices had soared to as high as $2,055.7 until May but then fell to $1,831.8 on the 5th of this month due to the Federal Reserve's (Fed) tightening policy. However, following the outbreak of the Israel-Palestine armed conflict in the Middle East last week, gold prices have surged consecutively on the 6th ($1,845.2), 9th ($1,864.3), 10th ($1,875.3), and 11th ($1,887.3).

Gold is a representative safe-haven asset with no default risk, so its price tends to rise during times of global geopolitical tension. This Middle East war involves complex entanglements among major oil-producing countries such as Iran, its adversary the U.S., Saudi Arabia as the leader of the Islamic world, and Lebanon and Syria, which share borders with Israel, making it likely to continue for a long time. If the war escalates to involve the U.S. or Iran, it is expected to accelerate the global economic recession and increase demand for gold as a safe-haven asset.

Expectations of U.S. easing... 'Gold' instead of the dollar

Amid growing geopolitical uncertainty, the slight wavering of the U.S. tightening stance is also expected to be a factor driving gold prices higher. Typically, gold moves inversely to U.S. interest rates and the dollar's value. Since gold is a non-interest-bearing investment, it becomes less attractive compared to other interest-bearing investments like deposits and bonds during high interest rate periods. In fact, when expectations that the Fed's rate hikes would soon end caused the dollar to weaken in May, gold prices surpassed $2,000. However, as the U.S. economy unexpectedly showed strength and Fed tightening and a strong dollar intensified, gold prices plunged to around $1,830 earlier this month.

Although the Fed's high interest rate policy is still in place, the atmosphere has subtly begun to change recently. Raphael Bostic, President of the Atlanta Federal Reserve Bank, said, "The Israel war and the conflict between Palestine's Hamas add uncertainty," and "there is no need for the Fed to raise rates further." Similarly, Lorie Logan, President of the Dallas Fed, stated, "The need for the Fed to raise rates may diminish." With dovish remarks from Fed officials continuing, the dollar index, which measures the dollar's value against six major currencies, dropped from 107 last week to 105 recently, halting its upward trend.

Following the war, the preference for safe-haven assets has expanded, causing U.S. Treasury yields to decline. Since bond yields and bond prices move inversely, increased demand for U.S. Treasuries as safe assets due to war concerns pushes prices up and yields down. The 10-year U.S. Treasury yield rose to 4.81% on the 3rd (local time) amid tightening concerns, marking the highest level in 16 years since 2007, but then sharply dropped to around 4.55%. If U.S. Treasury yields and the dollar's value continue to fall, gold prices could see further gains.

Chinese President Xi Jinping is making a toast at the National Day reception held at the Great Hall of the People in Beijing, China, on the afternoon of the 28th of last month.
[Image source=Yonhap News]

China increases gold holdings for 10 consecutive months

Steady gold purchases by central banks, including China, are also supporting gold prices. According to a recent report from the World Gold Council (WGC), global central banks bought 77 tons of gold in August, increasing their holdings for the third consecutive month. While central banks sold more gold than they bought in April and May, recent months have seen a clear increase in purchases. Krishan Gopal, WGC's chief analyst, explained, "Central bank gold buying remains robust," adding, "Considering the net sales at the beginning of the year, the current pace of purchases suggests that total annual purchases will again show strength."

China, in particular, has led the global gold market by purchasing gold for 10 consecutive months since November last year. The purchase volumes have increased for five consecutive months: 8.1 tons in April, 15.9 tons in May, 21.2 tons in June, 23 tons in July, and 28.9 tons in August. China is selling U.S. Treasuries and increasing gold holdings as part of its hegemonic competition with the U.S. dollar, so as long as U.S.-China tensions continue, it is highly likely that China will keep increasing its gold purchases.

As of August, China's gold holdings stood at 2,165.4 tons, ranking 7th globally after the U.S., Germany, the International Monetary Fund (IMF), Italy, France, and Russia. In contrast, South Korea (104.4 tons) has stopped buying gold since February 2013, ranking only 38th worldwide, below countries like Greece, Libya, and Mexico.

Will gold prices continue to rise? Eyes on U.S. tightening policy

However, it remains uncertain whether gold prices will continue their upward trend. The Israel-Palestine war is the biggest variable. If the war escalates and investors' risk aversion strengthens, gold prices could rise. Conversely, if international oil prices surge, increasing pressure on the Fed to raise policy rates, gold prices could again be pressured by a strong dollar. The possibility of further rate hikes in the U.S. is uncertain, with divided opinions even within the Fed. Upcoming U.S. consumer price index (CPI) and employment data could also be variables.

In fact, many analyses foresee additional rate hikes. The Bank of Korea's London office explained the interest rate outlook amid the Middle East war, stating, "Some expect a pattern similar to the market situation at the outbreak of the Russia-Ukraine war last year, where initially safe-haven demand would exert downward pressure on rates, but over time, supply shocks causing oil and gas price increases could strengthen the tightening stance of major central banks, leading to a reversal and rise in interest rates."