Gold's Recent 'Abnormal' Behavior: What Does It Mean?

News 2024-11-12 (180)

Gold's performance has deviated from the norm, breaking its typical inverse relationship with US stocks, the US dollar, and Treasury yields, and there are good reasons for this change.

Capital Economics' Chief Climate and Commodities Economist, David Oxley, noted in a report that while gold's performance was "normal" during the summer, it has recently re-entered an "unconventional driver mode."

Gold futures have risen by more than 3% this month, with its strong trend accompanied by a sharp increase in US Treasury yields and the US dollar.

Typically, a stronger US dollar would put pressure on commodities priced in dollars (such as gold), and rising Treasury yields would increase the opportunity cost of holding non-interest-bearing assets. However, as of this month, the ICE US Dollar Index has risen by more than 3%. On Thursday, the 10-year Treasury yield was 57.9 basis points higher than the 52-week low of 3.622% on September 16.

Despite this, gold futures reached historical closing and intraday highs on October 22, with the December contract closing at $2,759.80 and an intraday high of $2,763.30.

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Michael Armbruster, co-founder and managing partner of Altavest, believes that gold's immunity to a stronger dollar and rising yields indicates that the actual demand for gold is strong in overseas markets, especially among central banks committed to de-dollarization.

Oxley also mentioned that the continued strength of gold may reflect a broader paradigm shift towards "BRICS+" central banks increasing their gold reserves to reduce dependence on the US dollar.

Oxley believes that if investors are concerned about fiscal waste, financial repression, and threats to the independence of the Federal Reserve, then gold will become a more attractive asset.

Additionally, the possibility of a recession is also one of the reasons for gold's strength.

Jim Rogers, chairman of Beeland Interests Inc., said in an interview with MarketWatch that the US economy may be on the verge of a "very severe" recession. He pointed out that gold and silver have historically been safe havens during times of economic turmoil, so they may perform well. The strong performance of gold seems to suggest that there may be more money printing and various potential issues in the future.However, due to the gold price being close to historical highs, while the silver price is still far below its peak, Rogers has expressed a preference for purchasing silver.

In the meantime, Armbruster stated that the US budget deficit is nearing $2 trillion annually, and it may increase in the coming years even without war or recession, thus "investors consider gold to be a more attractive option."

Armbruster said, "We believe that the main uptrend for gold may have just begun."

He mentioned that investors are gradually realizing that inflation may accelerate again in the coming months, leading to a decline in expectations for interest rate cuts. "We believe that the gold price may still be in the early stages of a significant increase.

However, Oxley advises investors to remain cautious, pointing out that the gravity of the economy usually re-emerges, and investing in gold is not a one-way bet. He stated that the market's enthusiasm for gold is gradually shifting towards "Fear of Missing Out" (FOMO), a mentality commonly seen in bubble markets, which is undoubtedly concerning.

Therefore, Capital Economics still maintains its gold price forecast of $2,750 by the end of 2025 but believes that there may be significant adjustments in the future.

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