Gold: Why gold’s recent all-time high is strange

(BFM Bourse) – The precious metal surpassed its all-time high this week, approaching $2,150 an ounce. But this recent progress is not justified by the fundamentals.

If major American, European, or even (and especially) Japanese indices, such as Bitcoin, are setting records, gold is not left out.

The precious metal surpassed its all-time high in the stock market on Tuesday, hitting a new high this week at $2,185.50.

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However, this recent rise in gold is not easy to explain. Bloomberg also notes that this upward momentum surprised market watchers.

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The logic on rates that doesn’t work

For one simple reason: in theory, the evolution of gold is negatively correlated with interest rates. The higher the interest rates, the less attractive gold is in theory, all things being equal. Unlike stocks (with dividends) and bonds (with coupons), gold does not generate income. Interest rates rise as a result of its price, as it then becomes less and less interesting to invest your money in gold instead.

However, despite the consensus that the central bank’s key rates have reached their peak, the market has been forced to significantly revise down its expectations for a rate cut in recent weeks. For example, according to CME Group’s FedWatch tool, investors are counting on the first cut from the US Federal Reserve in June, while the market was still banking on late March in 2023.

The number of rate cuts has also been largely revised downward, and Apollo Fund chief economist Thorsten Schlock is also banking on no cuts this year from the Fed.

“The momentum and the speed (of gold’s rise, editor’s note) was very sudden, very fast,” HSBC Holdings PLC analyst James Steele told Bloomberg. “There doesn’t seem to be any compelling evidence” that justifies the move, he added.

Physical demand for the coin or bar may be stronger than expected, with Bloomberg raising the possibility that Chinese consumers bought gold to hedge against volatility in stock and real estate markets during the Lunar New Year festivities.

Quoted by the agency, Ole Hansen, commodity strategist at Saxo Bank, believes that the risk of a correction in global equity markets may also have boosted demand.

Perhaps some major central bank purchases may have also provided some support. According to Bloomberg, the People’s Bank of China, the country’s central bank, announced this Thursday that it has increased its gold reserves for the sixteenth consecutive month.

Technical elements?

UBS questioned gold’s rise in a note published on Wednesday. “If we were among those promoting the idea that gold could advance significantly this year on better fundamentals, the last few days have not accounted for that,” the Swiss bank judges said.

The establishment also points to the theoretical inconsistency of rising gold prices at a time when financial markets are consolidating a key rate cut by the Fed of 86 basis points, or 0.86%, compared to 117 basis points just a month ago.

“Therefore gold is clearly influenced by other elements. We believe that more technical factors are at work recently, with prices breaking through key resistance levels”, thanks to short-term oriented buyers, UBS believes. “But increased attention to the US presidential election, continued central bank buying and still relatively moderate speculative conditions suggest that the bullish future still has a bright future in the medium term, especially if ETF purchases (index funds, editor’s note) are recovering. (usually following the trend)”, develops the bank.

UBS talks about the medium term. In the short term, the Swiss establishment recommends waiting before positioning itself on the precious metal to avoid disappointment. The bank suggests a return to around $2,000 or $2,050 for gold before consolidating long positions. The establishment also suggests looking at mining groups extracting gold instead of buying the raw material immediately. If the bank does not give a name, we can cite Canadian Barrick Gold or British Fresnillo as examples.