Will the gold price rally continue? It’s not just you; even veteran investor Chris Wood of Jefferies is baffled by the surge in gold prices. Gold prices have experienced an upward trajectory in recent months, surging by approximately 29 percent since October. Moreover, due to robust US inflation data and speculation surrounding a potential rate cut by the US Federal Reserve, gold prices today (April 12) witnessed a surge to unprecedented levels in both domestic and international markets. The Comex gold price soared to a record high of $2,412 per troy ounce, while the spot gold price reached a new pinnacle of $2,395 per ounce during early deals.
Typically, the price of gold rises when inflation spikes. While inflation has been increasing globally, the pace of the overall price rise has cooled down, but at the same time, there’s no slowdown in the price of gold, surprising Wood.
The surprise rise in American inflation in March also took the US dollar to a 34-year high. Since the global prices of commodities like gold and oil are denominated in dollars, the rising value of dollars should typically cap the rise in commodity prices.
However, the recent trend has been in the opposite direction. While the rally in oil prices can be explained by the supply curbs initiated by OPEC (the lobby of the world’s biggest oil exporters), the rationale for the rally in gold prices isn’t obvious.
Moreover, the unexpected surge in American inflation during March pushed the US dollar to its highest level in 34 years. Traditionally, as commodities such as gold and oil are priced in dollars globally, a strengthening dollar tends to suppress commodity prices. Yet, recent trends have contradicted this assumption. While the surge in oil prices can be rationalised by OPEC’s supply constraints, the underlying reasons for the upward trajectory of gold prices remain unclear.
“Greed and Fear have no idea who or what was behind such a trade, save to note that a soaring gold price is not in the interest of the relevant authorities any more than a surging oil price is. Gold is up by 29 percent since early October and by 18 percent since mid-February, while the Brent crude oil price is up by 25 percent since mid-December,” Wood stated.
What Has Left Woods Baffled?
-For now, at least there continues to be a notable lack of inflows into gold ETFs in the Western world. Rather the reverse is the case.
-Gold ETFs’ holdings have declined by 120 tonnes a year to date to 2,542 tonnes as of Wednesday following a decline of 254 tonnes in 2023, according to Bloomberg.
-The physical premium on gold bars and coins traded in Singapore is at only a normal 1-2% compared with the 7-8% levels seen at the peak of the last bull market in 2011 and 2012.
-There is also no evidence of a sudden pickup in sales of American Eagle Bullion coins, one of the most popular series in the US. In fact, American Eagle gold bullion coin sales declined from 19,500oz in February to 12,000 oz in March, the lowest level for the month of March since 2019.
-While gold mining stocks have rallied this year, they are not really outperforming bullion on the scale that would normally be expected to happen in a roaring bull market, which is what happened in the 2001 to 2011 period.
-Gold mining stocks remain extremely cheap based on the current bullion price. The NYSE Arca Gold BUGS Index is trading at the same level as it was in December 2005 when the gold price was only around US$500/oz.
Wood added that if all of the above factors show a distinct lack of investor euphoria as regards gold, the question remains what is driving the current rally.
“The most plausible explanation remains demand from China. Still there is a lack of concrete data to confirm such an explanation,” he noted.
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