(Bloomberg Opinion) — Gold prices have clearly broken out of ranges seen since the turn of the century, hitting a record high of $2,195 a troy ounce this month. While a surge in buying from China may be behind gold’s recent rally, some of the more traditional factors that typically drive gold higher are starting to come into play. A new record beckons.
China has been diversifying its national currency reserves toward gold for much of the past decade, although reporting on its activities has been patchy. Whether China will continue its record price growth is now a big question, but the appetite of the country’s wealthy appears to remain unsatisfied.
Physical gold exports from Switzerland to China almost tripled in January, according to the Swiss Federal Customs Administration. This suggests that after a turbulent period in China’s real estate and stock markets, Chinese individuals are looking for a haven in the oldest form of financial security.
There are other signs that gold demand is picking up more broadly. Analysts at Societe Generale SA reported a record monthly inflow into gold from fund managers in February, worth $11.3 billion. Over the past two weeks, COMEX gold futures have seen their largest increase in net new long positions in five years, but open interest exposure is still not close to record levels, with 426,000 contracts currently held compared with 550,000 contracts held at the end of 2019.
The decline in gold-related exchange-traded fund holdings remains puzzling. These pairs typically closely correlate with gold prices, but have seen a huge divergence since late 2022. Outflows for the ninth consecutive month From physically backed ETFs, $5.7 billion has been sold so far this year.Still, these outflows cannot be compared with Strong demand from central banksThe annual purchasing volume has exceeded 1,000 tons for two consecutive years.
Gold’s performance—or lack thereof — has confounded analysts in recent years. When the Fed triggers its massive pandemic monetary stimulus package, conventional logic would expect new highs. But the subsequent surge in inflation, driven in large part by soaring energy prices, was also accompanied by an economic collapse. Gold’s correlation with other asset classes. Rising interest rates were supposed to be bad for gold and the outbreak of war was good, but the response was minimal.
Chris Watling, founder of investment advisory firm Longview Economics, said the three major historical drivers of gold prices are the U.S. dollar, inflation expectations and interest rate forecasts. Although these people came late, they began to express their opinions.
The U.S. dollar index has fallen nearly 4% since early November, making the metal cheaper to buy. Inflation has been slowing for some time, so it’s hard to put as much trust in gold’s recent rally. An expert way to track gold’s relationship with the monetary side of the economy is to monitor bond yields after adjusting for inflation. Since mid-February, U.S. 10-year inflation-linked bond yields have fallen 20 basis points to around 1.8%; falling real yields have supported gold’s gains as putting money into bonds is relatively less attractive. At the same time, the futures market expects that the Federal Reserve will cut interest rates in the second half of this year, which should support higher gold prices.
For gold fans, its fundamental appeal comes from its contrast with currencies backed by profligate governments. For example, the U.S. fiscal deficit will increase over the next decade, according to the Congressional Budget Office. The ensuing debt issuance will continue to increase, giving precious metals enthusiasts additional reasons to be bullish. While Bitcoin’s recent all-time highs were driven by the launch of cryptocurrency ETFs, the underlying driver of demand is a similar disdain for fiat currencies.
Rather than simply wondering whether China has bought another truckload of steel ingots, investors have some less intangible reasons to allocate more funds to the metal. Escalating geopolitical tensions, the prospect of troubled elections in several countries, and an increasingly favorable economic backdrop for gold will pave the way for gold prices to reach new highs.
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Marcus Ashworth (email protected)
