Gold prices have reached unprecedented heights, climbing over 1% in response to escalating geopolitical tensions in the Middle East, specifically fears of an imminent ballistic missile attack from Iran on Israel. Spot gold soared to $2,661.99 per ounce, just shy of its record high of $2,685.42 reached on September 26. Analysts attribute the recent spike in prices to a blend of safe-haven demand amid conflict and anticipation of U.S. Federal Reserve interest rate cuts. However, this rally has paradoxically coincided with a marked decline in physical demand across key markets.
Despite the recent surge, industry players report a sharp drop in physical gold demand. Robin Kolvenbach, head of the Swiss refinery Argor-Heraeus, noted that "physical demand in general is super low everywhere now." He indicated that while there was a brief uptick in August following India's reduction of import duties on gold, demand has since plummeted. "Consumers are finding it difficult to cope with the price increase. Currently, we are witnessing a significant slowdown in demand," explained Prithviraj Kothari, president of the India Bullion and Jewellers Association (IBJA).
The decline in physical purchases is notable in major markets. In Germany, which remains the largest market for physical gold investment in Europe, demand has decreased by about 50%. Wolfgang Wrzesniok-Rossbach, founder of precious metals consultancy Fragold GmbH, reported that imports of newly minted bars and coins have dropped by nearly 80%. He noted that secondary materials from buybacks have been covering the difference, indicating a troubling trend for future demand.
The situation is further complicated by conditions in China, where gold prices have also hit record highs. Hamad Hussain, an analyst at Capital Economics, pointed out that while ETF demand in Europe and North America may be strong, "demand for both physical and paper gold in China now appears to be weakening from elevated levels." This is particularly concerning as China had not imported any gold from Switzerland in August, marking a significant shift in purchasing patterns.
On the other hand, online marketplaces in Western markets have seen mixed activity. Ken Lewis, CEO of APMEX, reported that consumers are increasingly booking profits. "We are seeing consumers actually buying at a higher ratio to selling than we had seen in previous weeks," he noted, suggesting a possible shift in consumer strategy as prices rise. Meanwhile, Gold Avenue has seen a 66% increase in purchases since the Fed's recent rate cut, although there has also been a notable rise in customers selling their gold.
Analysts suggest that the remedy for high prices-high prices themselves-may not be effective in the current climate. Adrian Ash, head of research at BullionVault, remarked, "The cure for high prices is supposed to be high prices. But gold keeps defying that logic, setting fresh record highs even though visible demand has either collapsed or gone negative across pretty much all segments." This anomaly raises questions about market behavior and the potential for sustained high prices despite faltering physical demand.
As the geopolitical landscape continues to shift, market participants remain vigilant. A senior market analyst at Kitco Metals, Jim Wyckoff, remarked on the safe-haven demand for gold, stating, "It does appear that Iran is going to launch a significant attack against Israel, prompting keen safe-haven demand for gold." Traders are particularly concerned that if casualties arise from an attack, it could trigger an all-out war in the region.
The implications of these dynamics extend beyond immediate market prices. The broader economic outlook remains intertwined with these developments. Expectations of lower U.S. interest rates, alongside the uncertainty created by geopolitical conflicts, suggest that gold could remain an attractive option for investors seeking safety. This complex interplay of factors illustrates the delicate balance between rising gold prices and waning physical demand, creating a paradox that could define the precious metals market in the coming months.
