The Strategist

Gold hits six-year high in anticipation of G20 summit

06/28/2019 - 10:36

Total assets of exchange-traded funds focused on investing in the precious metal came close to the level of 2.3 thousand tons, updating the six-year maximum. The plans of the US Federal Reserve System (Fed) to return to the rate reduction cycle, as well as an increase in geopolitical tensions in the Middle East, are forcing investors to acquire gold in bulk. However, such investments may turn out to be short-term if, within the framework of the G20, the leaders of the USA and China reach some sort of agreement on trade contradictions.

Data from Bloomberg shows high demand for gold from international investors. As a result of trading on June 25, total assets of exchange-traded funds investing in gold reached 2,296.7 tons. This is the maximum value since April 17, 2013. Confident growth in assets has been noticed for the fourth week in a row. During this time the assets have grown by almost 110 tons, and added 47 tons over the last week. The surge of interest in the precious metal from professional investors had a positive impact on its value. The price of gold on June 25 rose to a maximum since May 14, 2013 - $ 1,438 per troy ounce, adding more than 12% in less than a month, and on June 26 stopped near the mark of $ 1,412 per ounce.

Results of the meeting of the US Federal Reserve that ended last week contributed to the renewal of multi-year highs in the gold market. As analysts had expected, the open market committee kept the target rate range unchanged (2.25–2.50%), noting that the Fed is ready to change monetary policy to support the economy if necessary. In addition, 7 out of 17 regulator managers expect two rate cuts by the end of the year. As a result, investors estimated likelihood of interest rate cuts in July at 100%, and inflation expectations also increased.

Growing geopolitical tensions in the Middle East also contribute to the interest in gold.

Last week, Iran shot down an US unmanned aircraft. In response, US President Donald Trump said that he was ready to strike at Iran, but refused later. On Tuesday morning, Washington imposed additional sanctions on Iran against its supreme leader, Ayatollah Ali Khamenei. “This step increased the risks of further escalation of relations between the two countries,” said Carsten Menke of Julius Baer.

However, analysts note volatility of the current demand for the precious metal. According to Carsten Menke, geopolitical risks usually do not provide long-term support for gold quotes unless they adversely affect the global economy or financial markets.