Gold prices have reached unprecedented levels, while base metals remain under pressure
Spot and futures gold prices hit new highs on Friday amid growing speculation that central banks will cut rates before the end of the year. Spot prices surpassed the $2,500 (€2,264) per ounce mark for the first time ever, while futures traded above $2,540 per ounce during the last trading session of the previous week. Similar price ranges were seen in Asian markets on Monday.
In contrast, base metals such as copper continue to struggle due to economic uncertainty. Copper futures hit a five-month low of $3.93 (€3.56) per pound in early August before recovering slightly to $4.18 (€3.79) on Monday, mainly influenced by weak demand from China.
Gold futures rose 5% over the past quarter, while copper futures fell 18%. This mixed performance in gold and copper prices indicates that investors are gravitating towards safer assets, distancing themselves from growth-dependent commodities amid concerns about the stability of the global economy.
Macroeconomic conditions driving gold price growth
Macroeconomic conditions indicate that central banks are considering easing monetary policy amid declining consumer prices and slowing economic growth. Gold prices tend to move in inverse correlation to the strength of the US dollar and interest rates.
First, because the price of gold is expressed in U.S. dollars, a weakening dollar reduces its value in other currencies, causing demand for the precious metal to rise. Second, lower interest rates make cash and other interest-earning assets less attractive, while gold becomes more attractive in comparison.
The surge in gold prices may have been triggered by disappointing U.S. housing construction data released on Friday. The data showed that construction starts fell 6.8% to their lowest level in four years, while building permits continued to decline for the sixth consecutive month in July.
This further fueled expectations that the Federal Reserve may start cutting rates in September.
In addition, the UK and the US reported lower than expected inflation data for July, a sign that rate cuts in these countries may not be far off.
In addition, the Reserve Bank of New Zealand unexpectedly cut rates – the first time it has done so since the pandemic began. The bank expects more cuts this year, having abruptly changed its policy stance due to the rapidly deteriorating state of the national economy.
Increased demand for safe-haven assets, caused by ongoing conflicts in the Middle East and the Russia-Ukraine region, also contributed to the rise in gold prices.
China’s impact on copper prices
As a major player in both the supply and consumption of copper, China has a significant influence on trends in the market for the most important metals.
Previously, the sharp rise in copper prices this year was largely due to lower production in China, which was driven by lower copper processing fees.
However, China’s weak economic performance in recent months, combined with volatile global markets and concerns about a possible recession in the U.S., caused copper prices to fall to a five-month low on August 8.
Despite a slight recovery in market sentiment pushing copper prices higher last week, continued weakness in China’s real estate sector is expected to further suppress demand. On the other hand, the weakening US dollar may partially alleviate downward pressure.
In the longer term, copper is likely to maintain its upward trajectory. The metal is a vital resource for renewable energy, electric vehicle production and the development of artificial intelligence.
S&P Global forecasts that copper demand will double to 50 million tons by 2035, with the U.S., China, Europe and India accounting for the bulk of demand.