Gold Watch - The sky seems the limit for gold prices

Break out

During the period mid-2020 until the end of 2023, gold prices traded in a wide range of USD 1,600 to 2,070 per ounce. The market tested the top of the range several times, but a clear breakout on the upside was only forced at the end of February 2024. Since then, gold prices have rallied strongly and they are now 14% higher than at the start of the year. The main question is why have are gold prices risen that much?

Has the expected central bank easing supported gold prices? No

The market has already anticipated the possible start of the easing cycle by major central banks for quite some time now. Even though the ECB is set to start easing in June, the Fed will start later in our view. In fact expectations about monetary policy easing in the US have decreased in recent months. Therefore, gold prices should be lower and not higher.

Have higher inflation numbers in the US supported gold prices? Yes and No

US inflation data have surprised to the upside in recent months. This has resulted in an adjustment in expectations about the Fed, start the easing cycle later and cut less in 2024. The 5y and 10y US real yields have increased since the start of this year indicating that gold prices should have been lower. However, the 2y US real yields have declined which could have been a support for gold prices.

Has the movement in the US dollar supported gold prices? No

So far this year, the US dollar has had a good run. It has risen by approximately 5% against a basket of currencies. Gold prices have the tendency to decline if the dollar rises.

Have investors piled up gold? No

Over recent years, ETF investors have decreased their positions. Total gold ETF positions are now back at the level of the start of 2020. Speculative positions in the futures market have been relatively stable at an average level. Usually if ETF investors liquidate their positions gold prices decline.

Is there a physical gold shortage? No

During the COVID crisis, physical gold experienced a shortage. This translated into high gold demand on the futures market and a large premium to buy physical gold. So far this year, speculative positions on the futures markets have not risen strongly. In addition there are no premiums paid on gold coins. In fact, the price of some of the gold coins are considerably below spot gold prices. So according to these factors there is no shortage.

So what did result in higher gold prices?

There are three main factors that have supported gold prices. First, investors seem to have bought gold for safe haven reasons and have only bought certain forms of gold. They also have bought gold options with upside strikes for December, for example with strikes of USD 2,500 and 3,000 per ounce. Second, central banks, for example of China and India, have bought gold. Indeed, world gold reserves have risen by 2% since mid-2022. Third, the technical picture has become more positive resulting in trend buying by investors.

What do we expect for gold prices?

The trend in gold prices is positive and the sky seems to be the limit. However we remain cautious for the following reasons. It is unusual for gold prices to have positive relationships with the US dollar and 5yr and 10yr US real yields. Even though these changes have occurred in the past, they tend to be temporary in nature meaning that they could last around 3 to 6 months. If gold were to react to central bank expectations again, it will probably remain stable versus the US dollar and rise somewhat versus the euro, reflecting our Fed and ECB views compared to the market. In addition there is no shortage in physical gold at the moment and the amount of central bank buying is not justifying gold prices at current levels. Therefore we keep our year-end forecast of USD 2,000 per ounce for now.