ETERNAL METAL BACK IN DEMAND

In early August, global gold prices once again hit a historic high, surpassing $2,569 per troy ounce during trading on the Comex exchange. Experts attribute the rapid increase in the price of the precious metal to the policies of the US Federal Reserve (Fed) and other leading central banks regarding interest rates, as well as the growing demand for safe assets due to geopolitical tensions. Investors are increasingly using gold to hedge risks—since the beginning of 2024, the precious metal has risen in price by almost a quarter, and it is expected that the price growth will continue into the next year. These prospects are beneficial for Azerbaijan, which is expanding its exploration and development of new precious metal deposits and is interested in increasing exports.

Precious Fluctuations

Historically, large-scale socio-economic upheavals of global significance and any major military conflict have led a significant portion of investors to hedge risks by transferring part of their funds into safe assets, the main one being gold. Investments in precious metals allow banks, various state funds, and other entities to diversify their investment portfolios and reduce risks associated with fluctuations in the returns of other assets. At the same time, the demand for gold depends on several other factors: this metal is actively used in microelectronics, medicine, jewellery production, and other industries. According to some estimates, since 2000, the return on gold investments has increased eightfold.

However, the primary demand for gold is formed in the financial sector: investors' reactions here depend on the margin between the interest rate and the numerical expression of money depreciation. If it is possible to profit from investing in securities and other financial assets with minimal risk of capital loss, investors are in no hurry to buy gold, whose interest yield is low, and, on the contrary, certain expenses are required for the safe storage of the metal. On the other hand, when interest rates on alternative assets cannot cover the level of inflation or fall to zero, investors are forced to turn to gold.

Notably, in the early post-pandemic period, the international gold market maintained remarkable stability, despite the massive issuance of leading world currencies, especially the US dollar. This is because, after the lifting of quarantine restrictions and the economic recovery in 2021, investors found more profitable instruments in the form of real estate, stocks, commodities, and cryptocurrencies. Therefore, there was no significant increase in gold prices worldwide. Only with the onset of the Russia-Ukraine war in the spring of 2022 did the market respond with increased demand. However, by the end of the year, exchange prices stabilized at around $1,800 per troy ounce, remaining almost within the same range as before. Another surge was observed in the fall of last year, triggered by the escalation of the conflict in the Gaza Strip and the confrontation with the Houthis. This led to transportation issues in the Suez Canal area. Nevertheless, the price increase in 2023 was a relatively modest 8%, stopping at an average level of $1,940 per ounce.

The situation in the precious metals trading platforms began to change dramatically in the spring of this year. Over five months, gold prices rose by nearly 20%, and by the end of May, they reached a new historical record of $2,454 per troy ounce. This growth was not hindered even by the delay in lowering interest rates by the Fed due to persistent inflation concerns. In recent months, the market has been reacting not to specific decisions but to promises from the Fed and other leading regulators to begin a cycle of interest rate cuts in the fall of 2024. Typically, the price of gold is inversely proportional to the value of the US dollar. Since gold is priced in dollars, a decline in the dollar automatically leads to an increase in the price of gold.

During its July meeting, the Fed maintained the interest rate at 5.25-5.5% for the eighth consecutive time. However, Fed Chair Jerome Powell noted the successes in combating inflation, stating that this allows the Fed to shift focus to restoring economic activity and reducing unemployment, thus "the time has come to start lowering the key interest rate from its 23-year high." It is expected that at the mid-September meeting, the Fed will announce a quarter-point rate cut.

Another significant factor affecting the balance of the precious metals market is the intensified policy of leading central banks to increase the share of precious metals in their reserves. According to the World Gold Council, in 2022, global central banks purchased 1,082 tons of gold, the highest amount ever recorded. In 2023, the volume of purchases slightly decreased to 1,037 tons. From January to June of this year, regulators acquired 483 tons of gold, 5% more than the same period last year. The most active buyers of gold included China, India, Türkiye, Poland, Uzbekistan, and the Czech Republic. This is accompanied by massive repatriation of gold reserves, driven by concerns over potential sanctions and economic instability. These trends, which began in December 2019, have recently become widespread, adding additional pressure on market demand, especially amid a decline in the supply of physical gold due to years of decreasing production worldwide.

Diverse Forecasts

Given these factors, it is not surprising that gold prices continued their steady rise this summer. In the second decade of August, the Comex exchange recorded a historic high of over $2,569 per troy ounce. According to Trading Economics, August gold futures increased by nearly one percent, and since the beginning of the year, the precious metal has risen by 21.5%.

"Given the clear signs of significant Fed rate cuts, we have raised our year-end gold price forecast. Several more rate cuts are likely in the first half of 2025. We expect the gold price to rise to at least $2,600 per ounce by mid-next year," noted Commerzbank commodity expert Carsten Fritsch.

Analysts at Freedom Finance Global (FFG) share a similar view: since early July, the dollar index against a basket of other reserve currencies has fallen by 3.8%, and the long-term upward trend in gold prices will continue until the Fed completes its cycle of monetary policy easing in the U.S.

FFG experts predict that global gold prices will rise to $2,700 per troy ounce, followed by a corrective decline and then a new wave of growth to an estimated $3,000. According to leading global investment bank Goldman Sachs, gold is currently in an unwavering "bullish" trend (prices are steadily rising) and could reach $2,700 per ounce by the end of the year. Citi Research specialists, in turn, do not rule out that prices could soar to $3,000 per ounce within the next 12-18 months, given certain catalysts. These include the de-dollarization of central banks in developing countries or another global recession, which could prompt the Fed to rapidly cut rates.

In the near future, it will become clear to what extent the expectations for global financial and monetary policy in the medium term are justified and how this will affect gold prices. However, ongoing conflicts in the Middle East and Ukraine suggest that even without further growth, it would be a mistake to expect a sharp decline in precious metal prices.

Profitable Growth

How beneficial is the growing global interest in gold for Azerbaijan, considering its extraction and export of precious metals, as well as the increase in their volume within the country's foreign exchange reserves?

On one hand, global trends are forcing Azerbaijan to diversify its foreign exchange reserves, particularly due to high risks to the investment portfolio from negative processes in the global economy and financial markets. In 2022, the State Oil Fund of Azerbaijan (SOFAZ) increased the share of gold from 13.1% to 13.9% of total assets. As a result, by early 2023, SOFAZ had reserved about 101.8 tons of gold. This trend continued in the first half of 2024, with gold reserves rising to 114.9 tons from January to June.

On the other hand, the situation is encouraging domestic producers to increase the extraction and export of precious metals. According to the State Statistics Committee, from January to July 2024, Azerbaijan produced over 1.248 tons of gold, a 5.6% increase, and nearly 1.907 tons of silver. Gold traditionally ranks among the top non-oil exports - from January to July, it was the third-largest export after tomatoes and raw cotton.

Amid global "bullish" trends in the precious metals market, Azerbaijan is expanding the exploration and development of new deposits. In the mining segment of the domestic economy, companies like Anglo Asian Mining Plc. (AAM) and AzerGold CJSC are active. Efforts are underway to increase the extraction of gold-bearing ore and its processing using modern technologies. At the end of July, AzerGold commissioned a new ore leaching plant at the Chovdar Integrated Regional Processing Area. The plant uses tank leaching technology and has established a waste processing system. AzerGold's investment in the enterprise is estimated at ₼383m, creating over a hundred permanent jobs. Overall, AzerGold continues active and multifaceted geological research to explore gold deposits, including in the Nakhchivan Autonomous Republic, as well as in the Dashkasan, Goygol, Balakan, and Kalbajar districts. In the coming years, exploratory and evaluation work using airborne electromagnetic surveys is planned in the Shusha, Khojaly, and Aghdara districts of the Garabagh region, promising steady growth in the development of precious metal deposits.

Anglo Asian Mining Plc., which is developing several gold, silver, and copper deposits in the republic, plans to extract the first ore from the Gilar deposit by the end of 2024, where gold, copper, and zinc reserves have been explored. In anticipation of processing richer ores from this deposit, the company has doubled the capacity of the flotation plant at the Gadabay mine to 160 tons per hour. At the same time, AAM has begun negotiations with the Azerbaijani government to gain access to its contract areas in the Garabagh economic region. Thus, in the near future, the development of the Demirli copper-molybdenum mine and the Gyzylbulag gold deposit may begin in Garabagh.

All these steps contribute to increasing productivity at the republic's gold-bearing deposits. It is forecasted that by 2026, gold production in Azerbaijan will exceed 3,000 tons.