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

(BFM Bourse) – The precious metal surpassed its historic record this week, to get closer to $2,150 per ounce. But this recent progression is not justified by the fundamentals.

If the major American, European, or even (and especially) Japanese indices, just like bitcoin, are setting records, gold is not left out.

The precious metal surpassed its historic record on the stock market on Tuesday, bringing its new peak this week to $2,185.50.

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This recent rise in gold is, however, not easy to explain. Bloomberg also notes that this upward movement surprised market observers.

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A logic on rates that does not work

For a simple reason: in theory, the evolution of gold is negatively correlated with that of interest rates. The higher the interest rates, the less theoretically attractive gold is, all things being equal. Unlike stocks (with dividends) and bonds (with coupons), gold does not produce income. Its price is consequently hit by a rise in interest rates, because it then becomes less and less interesting to invest your money in gold rather than investing it.

However, although there is unanimous agreement on the idea that central bank key rates have reached their peak, the market has been forced, in recent weeks, to significantly revise its expectations of rate cuts. For example, according to the CME Group’s FedWatch tool, investors are counting on a first cut in June from the American Federal Reserve, when the market was still banking on March at the end of 2023.

The number of rate cuts has also been largely revised downwards, and the chief economist of the Apollo fund, Thorsten Slok, is even banking on no cuts this year from the Fed.

“The velocity and the speed (of the rise in gold, editor’s note) was very sudden, very rapid,” James Steel, an analyst at HSBC Holdings Plc, told Bloomberg. “There doesn’t seem to be any compelling evidence” that justifies the move, he adds.

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

Quoted by the agency, Ole Hansen, commodities strategist at Saxo Bank, considers that the risk of a correction on global equity markets could also have boosted demand.

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

Technical elements?

UBS questioned the rise in gold in a note published on Wednesday. “Even if we were among the few to promote the idea that gold could progress significantly this year on the basis of better fundamentals, the account is not there in the last few days” from a fundamental point of view, judges the Swiss bank.

The establishment also points out the theoretical inconsistency of the rise in gold prices at a time when the monetary markets are integrating key rate cuts by the Fed of 86 basis points, or 0.86%, compared to 117 basis points just a month ago.

“Gold is therefore clearly influenced by other elements. We believe that more technical factors have been at play recently, with prices having crossed key resistance levels”, thanks to buyers oriented towards the short term, considers UBS. “But increasing attention to the US presidential election, continued central bank buying and still relatively modest speculative positioning indicate that this rally still has a bright future ahead of it in the medium term, particularly if ETF purchases (index funds, Editor’s note) are recovering (generally 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 in order to avoid disappointments. The bank suggests watching for a return of gold to around 2,000 or 2,050 dollars before strengthening a long position. The establishment also suggests looking at mining groups extracting gold rather than immediately buying the raw material itself. If the bank does not give a name, we can cite as examples the Canadian Barrick Gold or the British Fresnillo.