Inadequate Gold Prices: Analysis of the Current Situation
⇒ Warning. Any strategy does not guarantee profit on every trade. Strategy is an algorithm of actions. Any algorithm is a systematic work. Success in trading is to adhere to systematic work.
💰 How “Paper” Gold Controls Prices and Threatens the World Economy
Gold prices in 2024 are showing significant volatility and deviations from their real value, driven by a number of factors artificially affecting the cost of this precious metal. The gold market is currently experiencing severe distortions caused not only by macroeconomic and geopolitical circumstances but also by specific characteristics of the market itself.
1️⃣ Distortion Between Physical and Paper Gold
One of the main factors contributing to the inadequacy of gold prices is the gap between the cost of physical gold (“spot”) and gold futures (“futures”). This gap, known as the Exchange for Physical (EFP), arose due to transportation and logistical restrictions. For example, the sharp reduction in international flights during the pandemic disrupted the movement of physical gold between London and New York, leading to higher costs and a surge in futures prices. Furthermore, the mismatch in gold storage standards (400 ounces in London versus 100 ounces on the COMEX in New York) exacerbated this issue, creating logistical bottlenecks and limiting market access.
These distortions have caused the price of gold futures in New York to significantly exceed the spot price in London. As a result, market participants began to question the true value of “paper” gold, as it no longer follows the fundamental market rules. Market liquidity has also suffered, as many players prefer not to participate in trades until logistical issues are resolved.
2️⃣ Speculative Activity and the Influence of Central Banks
Gold prices are also artificially supported by speculative activity and purchases by central banks. Central banks, such as those in China, Turkey, and India, continued to increase their gold reserves in 2024, adding 290 tons in the first quarter — the largest increase since 2000. These purchases put significant pressure on the market, raising the cost of gold amid limited supply.
Additionally, the gold market is affected by speculative financial instruments such as Exchange-Traded Funds (ETFs), which allow investors to bet on gold without physically purchasing it. This promotes the creation of “paper” gold, which may not have sufficient physical backing, further inflating prices and distorting market signals.
3️⃣ Impact of Macroeconomic Factors and Geopolitical Risks
The expected decrease in interest rates by the U.S. Federal Reserve (Fed) is another key factor contributing to rising gold prices. Lower interest rates make gold, a non-yielding asset, more attractive to investors, especially amid ongoing geopolitical risks and economic uncertainty. At the same time, the increase in gold prices is also associated with a loss of confidence in the U.S. dollar and a shift to alternative currencies in international settlements.
Geopolitical instability, including the ongoing conflict between Russia and Ukraine and conflicts in the Middle East, increases demand for gold as a safe-haven asset. This puts pressure on prices, creating a distorted perception of the true value of gold in the market.
4️⃣ Low Liquidity and Limited Arbitrage Opportunities
Lack of liquidity and limited arbitrage opportunities also contribute to inadequate gold prices. Despite attempts by some participants to exploit market inefficiencies for arbitrage, restrictions in the futures market and low liquidity prevent significant narrowing of the price gap. As a result, many market players refrain from participating in trades until logistical and other issues are resolved.
🔍 Conclusion
Current gold prices indeed reflect distortions caused by a combination of speculative activity, artificial supply constraints, macroeconomic factors, and liquidity problems. These factors create uncertainty in the market, forcing participants to reconsider their strategies and approaches to trading gold.
💬 What do you think about the current situation in the gold market? Share your opinion in the comments! 👇
BT
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