What’s Going on with Gold? Plus Puzzling ECB Reticence

Below is a round-up of Longview related views/research & trade ideas – this is published most Fridays, and updates key themes and highlights key pieces of (often contrarian) research.

Gold Breakout – What’s the Message?

After four attempts over the past 3 ½ years, gold has finally broken above its long term major resistance level this week of $2,050/$2,070 (and also above the Dec ‘23 intraday high – fig 1). Over that time, gold had been rangebound between ~$1,600 and $2,050/70, and resilient on the downside despite the extent of rate hikes, the strength of the US dollar in 2022, and the major rise in TIPS yields from early 2022 through to October last year.

So the question is: Why has the price held up so well (given those headwinds these past 2 years); and why is it now breaking out to the upside?

Fig 1: Gold price candlestick (USD/Oz) shown with key moving averages

Certainly, the fundamental drivers of the gold price changed in 2022 (at around the time of the start of the Ukraine war). Previously, TIPS yields, rate expectations, and the dollar generated a strong correlation with the gold price (contact Nick Beazley at nick@longvieweconomics.com for the full analysis). Investment demand had also been the main ‘physical/paper’ flow driving the marginal demand for gold.

From 2022 onwards, though, ‘price insensitive’ buyers, like the Chinese central bank emerged (along with other state actors¹). Many of those price-insensitive buyers were likely driven by geopolitical considerations (Russian war, US-China rivalry, etc).

In this latest breakout, though, gold has switched back to being driven by its old fundamental factors (i.e. rate expectations, TIPS yields, and the dollar). That is, as rate cuts have been priced back into the curve and the US dollar has embarked on a renewed phase of weakening, gold has rallied (i.e. since 13^th Feb), breaking through old highs (fig 2).

Fig 2: Gold (USD/oz.) & US dollar index (inverted)

We switched from UW to OW gold in our global asset allocation portfolio on 29^th February.

Drivers of Recent Gold Price Strength