Gold Soars to Record High; Copper Slumps Amid Economic Concerns
Gold prices have reached unprecedented levels, driven by growing expectations of a lower interest rate environment and increased demand for safe-haven assets. Meanwhile, base metals like copper are languishing due to sluggish economic growth, particularly in China, a major player in the global metals market.
On Friday, spot gold and futures prices surged to new records, buoyed by mounting expectations that central banks will commit to interest rate cuts for the remainder of the year. Spot gold surpassed $2,500 (€2,264) per ounce for the first time, while gold futures climbed above $2,540 per ounce by the end of last week. As trading resumed in Asia on Monday, prices continued to hover near these historic highs.
Divergence in Gold and Copper Markets
While gold is soaring, copper has struggled under the weight of economic concerns. Copper futures hit a five-month low of $3.93 (€3.56) per pound in early August, only to see a slight recovery to $4.18 (€3.79) on Monday. China, which has faced economic headwinds in recent months, is largely to blame for this weakness.
Over the past three months, gold futures have risen by 5%, in stark contrast to an 18% decline in copper futures. This divergence highlights a shift in investor sentiment, with many seeking refuge in safe-haven assets like gold while shedding growth-driven commodities amid global economic uncertainty.
Macro Forces Driving Gold Prices
The current macroeconomic environment suggests that central banks are likely to loosen monetary policies due to cooling inflation and slowing economic growth. These developments have benefited gold prices, which inversely correlate with the value of the U.S. dollar and interest rates.
A weaker U.S. dollar makes gold more affordable in other currencies, boosting demand for the precious metal. Additionally, lower interest rates make interest-bearing assets less attractive, enhancing gold's appeal as a store of value.
The catalyst for gold's recent surge may have been disappointing U.S. housing market data released last Friday, whichrevealed a 6.8% slump in housing starts to a four-year low and a continued decline in housing permits. This data has reinforced expectations that the Federal Reserve may begin cutting rates as early as September.
The U.K. and the U.S. also reported cooler-than-expected inflation data for July, further supporting the case for a lower interest rate environment. Additionally, the Reserve Bank of New Zealand's unexpected rate cut, its first since the pandemic, signals a broader shift towards more accommodative monetary policies globally.
Geopolitical tensions, including ongoing conflicts in the Middle East and the war between Ukraine and Russia, bolstered safe-haven demand for gold.
China's Influence on Copper Prices
China's role as both a major supplier and consumer of copper significantly influences global market trends. Earlier this year, copper prices surged due to reduced production in China, driven by a sharp decline in copper treatment charges.
However, weak economic data from China and global market turmoil, fuelled by recession fears, sent copper prices to a five-month low on August 8. Despite the recent recovery in copper prices, we expect ongoing challenges in China's property sector to keep demand subdued. A weakening U.S. dollar may provide relief, but the overall outlook remains cautious.
Given its critical role in renewable energy, electric vehicles (E.V.s), and artificial intelligence (A.I.) technologies, we expect copper to remain in an uptrend in the long term. S&P Global forecasts that copper demand will double, reaching 50 million metric tonnes by 2035, with significant demand growth anticipated from the U.S., China, Europe, and India.
A Tale of Two Metals
The current trends in the gold and copper markets reflect a broader narrative of economic uncertainty and shifting investor preferences. While gold continues to thrive as a haven amid expectations of lower interest rates and geopolitical tensions, copper remains vulnerable to economic slowdowns, particularly in China. However, the long-term outlook for copper remains strong, driven by its essential role in the future of technology and renewable energy.