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Gold: A Tale of Two Markets - Soaring Prices and Falling Demand

by Kaan Küçükemiroğlu
Gold: A Tale of Two Markets - Soaring Prices and Falling Demand

The tug-of-war between investors and central banks continues to dominate the gold market narrative. While investor confidence reaches new heights, pushing gold prices comfortably above $2100 per ounce, surprising counterpoint emerges: physical demand in major markets like Europe and the US stumbles.

This article delves into the two diverging parts of the gold market and explores the forces shaping these contrasting realities.


Investor Confidence Continues to Rise

Anticipated rate cuts remain elusive, with central banks potentially waiting for further confirmation of receding inflation. This has emboldened investors, driving gold prices beyond initial expectations. As inflation shows signs of cooling, gold retains its appeal as a safe haven asset.


The Physical Market: A Different Story

The picture in the physical market paints a different story. Soaring gold prices have dampened retail investment enthusiasm in key markets like Europe and the US.  Investors are opting to resell and lock in profits rather than commit to new purchases at these elevated levels. This shift in sentiment has led European refiners to explore alternative markets, with Turkey emerging as a new focal point.


Turkey: A Gold Rush Fuelled by Elections and Restrictions

Turkey is currently experiencing unprecedented demand and record premiums for gold. This surge is fuelled by a confluence of factors, including upcoming elections and ongoing currency struggles. A quota system implemented by the Turkish government restricts gold imports to only 14 tonnes total a month, creating a supply bottleneck. This limited supply, coupled with heightened demand, has further inflated premiums, pushing them to record levels around $150 per ounce. The Turkish State Mint is expected to produce a staggering 40 tonnes of coins in Q1 2024 alone, reflecting the exceptional demand in the country.


Contrasting Scenes in Other Markets

While Turkey experiences a gold rush, other major markets paint a contrasting picture. Dubai's gold souks, once bustling with local buyers, now cater primarily to tourists as local demand weakens under the weight of high prices. This has led to discounts in the Dubai market.  India, a traditional gold consumer, also faces weak demand due to high prices, impacting Dubai as a key gold supplier. China, another major gold consumer, presents a unique case. Unlike other markets, high premiums of around $15/oz last week in China are driven by domestic factors like deflation and a troubled real estate sector, rather than global price trends.


The Road Ahead: Uncertainties and Opportunities

The future path of the gold market remains shrouded in some uncertainty. A price correction to the low $2000s could entice renewed retail participation. Alternatively, if investors adapt to the new price level above $2100, we might see a resumption of buying activity. Regardless of the near-term trajectory, market experts generally expect a recovery in physical demand during the second half of 2024. Stay tuned for further analysis and insights as we navigate this complex and dynamic market in our bi-weekly updates on the global gold markets.

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