Gold’s mystery rally baffles analysts

The price of gold has surged 7 per cent in just over a week to hit record highs, leaving longtime market watchers struggling to explain what has been one of the yellow metal’s most curious rallies.

The sudden price move has lifted the haven asset above its previous peak reached in December to hit nearly $2,195 per troy ounce on Friday, according to LSEG data. Some commentators have attributed the move to growing expectations of US interest rate cuts, which would make the non-yielding asset relatively more attractive.

But several analysts say none of the factors that have driven gold’s bull run over the past 16 months are the likely catalyst for this recent rally. Those include record levels of central bank buying, Chinese households looking for havens for their money or the war in Ukraine and the Middle East.

“It has been the quietest, most confusing rally,” said Nicky Shiels, precious metals analyst at MKS Pamp, a Swiss gold refinery and trading house. “What took it from $2,000 [last month] to above $2,150 is the head-scratching part.”

The current rally kicked off when US manufacturing data at the beginning of the month showed a larger than expected contraction, strengthening investors’ conviction that the Federal Reserve could start to cut rates in June.

But the size of the moves in Treasury yields and the dollar did not appear to wholly justify the rally in gold, say analysts. The rate-sensitive two-year yield has fallen 0.12 percentage points since the start of March to 4.5 per cent, still much higher than January’s low of 4.12 per cent, while the greenback is still higher against a basket of six currencies than it was at the start of the year.

“Previously when we have had a rally of $70 to $80, it is usually accompanied by a new catalyst or risk event,” said Suki Cooper, analyst at Standard Chartered. “But this time there has been no significant shift in current events.”

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Gold on Monday was trading at $2,182 per troy ounce, after US jobs growth figures for December and January were downgraded sharply on Friday, adding further confidence to investors’ expectations of a rate cut in the first half of the year.

The nominal high has come despite outflows from gold-backed exchange traded funds of 21mn ounces in the past year, according to Bloomberg. In contrast, bitcoin, which hit a fresh high above $72,000 on Monday, has been boosted by billions of dollars pouring into ETFs since they launched in the US two months ago.

But Rhona O’Connell, analyst at commodities brokerage StoneX, said plenty of factors could justify a high gold price, such as China recently toughening its rhetoric on Taiwan, simmering banking tensions in the US and the elections coming in a number of countries this year.

But she said none of those factors was behind last week’s move, and instead pointed to momentum traders — computer funds that latch on to rising prices — piling in after gold broke through a key price level.

“There has been nothing specific or tangible we can point to apart from the done-to-death exercise of Fed watching,” O’Connell said.

The lack of immediately available data on flows in the market has led to suggestions that over-the-counter purchases by stealth buyers of gold, which are hard to trace, have dragged prices up.

Bernard Dahdah, senior commodities analyst at French bank Natixis, said the modest recent moves in the dollar and bond yields and continued outflows for ETFs had made it hard to pin gold’s rally on changing expectations of Fed rate cuts.

Neither could he attribute it to renewed demand from Chinese retail investors, because the premium for gold in China over London has narrowed, nor renewed central bank buying, as official institutions tend to buy slowly and want to go unnoticed.

“It’s the first time I’ve sat down discounting stuff rather than just saying what it is” that is moving the price, Dahdah said. “The ones who would be doing this would be a big hedge fund or asset manager” using derivatives.

In a sign of higher investor activity, the number of outstanding gold futures contracts on Comex has jumped 30 per cent since February 28, while net long positions rose about 64,000 to 208,000 contracts last Tuesday, according to Commodity Futures Trading Commission data.

“That rings warning bells for a substantial correction,” O’Connell said. “Once the momentum stops there will be profit-taking.”

Some believe the gold market’s rally is a symptom of investors running ahead of themselves on bets on rate cuts. “It’s not a foregone conclusion that the Fed is going to cut rates,” said Carsten Menke, head of next generation research at Julius Baer.

But not everyone believes gold prices are heading for a fall. Prices are still some way below the inflation-adjusted record of well above $3,000 per troy ounce hit in 1980 and some analysts say the current rally shows there is a firm floor under the price.

StanChart’s Cooper highlighted strong retail and central bank demand outside of the west, as well as the gold price’s jubilant reaction to marginal news supporting US rate cuts and its ability to hold up when data has pointed to rates staying higher for longer.

“There are too many unknown events that investors want to hedge for,” she said, citing elections, risks of conflict escalation or the return of a banking crisis. “It does look like we have new appetite in the gold market.”