Geopolitical Tensions Among Key Factors Driving Gold to Outperform Silver and Base Metals in H2 2024 – Bloomberg’s McGlone

Geopolitical Tensions Boost Gold’s Appeal

The escalating geopolitical tensions, often dubbed "Cold War 2.0," involving China, Russia, Iran, and North Korea against the United States and its allies, are a significant factor driving gold's potential to outperform other metals in the second half of 2024. This insight comes from Mike McGlone, Senior Commodity Strategist at Bloomberg Intelligence. He emphasizes that while there are numerous indicators favoring gold, the geopolitical landscape is particularly influential.

Gold’s Upper Hand in the Metals Market

McGlone notes that gold appears poised to outshine most commodities in the latter half of 2024. “Copper’s new high in the first half, contrasting with crude oil’s lackluster performance, may indicate a long-term trend of metals outperforming fossil fuels,” he writes in his Midyear Metals Outlook. “However, gold seems to have the upper hand in the second half of the year. Should the U.S. stock market maintain its momentum—with the S&P 500 up approximately 16% to June 24—base metals might stay buoyant. Yet, risks of a market correction could propel gold higher.”

Economic Factors and Gold’s Performance

China's property crisis and declining export demand are reflected in the country’s 10-year yield dropping to its lowest since 2006. McGlone highlights the strategic partnership between Russia and China, suggesting it has altered the global economic order with gold central to these shifts. "We anticipate that gold will continue to gain ground in the second half of the year," he states.

McGlone draws attention to historical correlations that favor gold. “The ratio of gold to the S&P 500 at 0.43 as of June 24 mirrors levels seen in 2007, just before the Great Recession,” he explains. “Meanwhile, the debt-to-market capitalization ratio has increased from 50% to 60% over the past 17 years. Gold’s 13% gain in 2024 might reflect an anticipation of rising debt and a potential equity market correction.”

Market Dynamics and Gold’s Trajectory

Bloomberg Intelligence foresees a more stable second half for gold prices. “Precious metals leading our performance scorecard while industrials lag could become more pronounced in the latter half of the year,” McGlone predicts. Despite the strength of the U.S. dollar, the advancement of silver, gold, and copper suggests a divergent strength among metals, though base metals face greater risks of a reversion.

Silver’s increasing industrial demand contrasts with gold’s continued monetary appeal. "Unless there’s an unexpected easing in geopolitical tensions, gold is likely to be a top performer in the second half," McGlone asserts. A potential downturn in the U.S. stock market could pose risks to copper and base metals while benefiting gold.

Chinese Government Bonds and Metal Ratios

McGlone also discusses the implications of Chinese government bond yields on metal prices. “The 10-year Chinese government bond yield at 2.25% on June 18 suggests a new low for the Bloomberg Industrial Metals Spot Subindex versus gold,” he writes. “This ratio, currently around 60, has fallen from 100 at the end of 2009, closely linked to Chinese bond yields.”

The downward trend in industrial metals compared to gold may continue, particularly if Chinese bonds indicate a deflationary recession. “The Hang Seng index’s historical low versus the S&P 500 since 1975 highlights significant risks to the global economy,” McGlone observes. “The combination of massive monetary stimulus and geopolitical conflicts has spiked the metals ratio, but the aftermath could be prolonged.”

Federal Reserve and Gold’s Future

McGlone agrees that gold prices will likely rise when the Federal Reserve starts cutting interest rates. “Expectations for risk-asset support, driven by anticipated Fed rate cuts, could buoy gold prices,” he notes. “The current ratio of gold to the S&P 500 is reminiscent of lows seen in 2003. A critical question for the second half is whether this ratio will recover or continue its downtrend from the peak 25 years ago. Our bias leans towards the latter, with Fed rate cuts acting as a catalyst.”

Gold vs. Silver Dynamics

Bloomberg Intelligence forecasts gold gaining against silver, noting that the gold/silver cross likely bottomed last month. “Historically, the unemployment rate has never bottomed from a low of 3.4% without exceeding 6% since 1947, which may support gold over silver,” McGlone explains. “The recent increase to 73 ounces of silver per ounce of gold might have set a floor under this ratio. At around 77 on June 20, 73 appears to be a key support level moving towards the first quarter high just above 90.”

In summary, geopolitical tensions, economic indicators, and market dynamics all suggest a promising outlook for gold in the second half of 2024. For more in-depth insights and updates on the precious metals market, stay connected with Vault Metal. Our expert analysis helps you make informed investment decisions in a complex financial landscape.

Source

Ernest Hoffman (2024). Kitco. Available at: https://www.kitco.com/news/article/2024-06-25/cold-war-20-just-one-reason-why-gold-will-outperform-silver-base-metals-h2