Dubai: Khaled Musa
After rising 8.1% to close the month of March at $2,214 per ounce, gold continues to record further rises to new levels.
According to a World Gold Council report, the rally that began in early March left some scratching their heads as to why. “Our Gold Return Model (GRAM) indicated that risk and momentum factors were behind the rally,” the council’s report says. Particularly effective was gold’s implied volatilities, which rose during March – as they did during September 2022, March 2023, and October 2023 – although this time they were not accompanied by a rise in implied volatilities for bonds (MOVE index ), and thus more suggestive of gold’s implied volatility.”
Net positions in COMEX managed funds futures had the third strongest month since 2019 on both short covering and new trades, and saw inflows into gold ETFs in all regions except Europe.
According to the World Gold Council, the Geopolitical Risk (GPR) Index rose again, as geopolitical tensions moved across several fronts. From a macro perspective – despite choppy markets and Fed weakness – there was a significant crossover in US data surprises, suggesting that stagflation risks may be on the rise again, a supportive development for gold prices.
An unprecedented separation
The Council’s report sees the emergence of an unprecedented disconnect between gold prices and global gold ETF flows, which has led to a gap between comparisons between the current all-time high (ATH) and the significant rise that occurred in 2011.
The Council found that US gold ETFs, as a share of total US ETFs, are much lower than they were 13 years ago, and what many consider an optimal weighting.
The fundamentals underlying the current rally include rising geopolitical risks, continued buying by central banks and resilient demand for jewellery, bullion and coins. Combined with the possibility of lower interest rates in the future, the suggestion is that ETFs have missed the rally and are now underallocated.
The Council noted that India, the largest democracy in the world, will go to the polls in April. The market is expected to witness little activity during the six-week election period. For example, the decline in the wedding season on the other hand suggests that, all other things being equal, we should not expect to see any pent-up demand from Indian consumers in June.
Trading centers
With gold reaching all-time highs, the assumption for most people is that trading positions are likely to be crowded, as 2011 looked like for example, but this is not the case.
When evaluating gold ETFs, as a percentage of total US ETF AUM, we find that their percentage share is at the fourth lowest level since inception. While past performance does not guarantee future returns, it is worth noting that the last time positioning reached these levels, gold embarked on a significant move higher with significant support from global gold ETFs.
Despite the rise in prices, the Gold Council currently sees gold as being under-owned, and unlike previous highs this time, it does not appear to be at a “top.”
According to the council, gold has reached an all-time high and is receiving attention. But assets at these levels present a challenge to investors who think they may have missed the boat. However, our analysis indicates that gold is currently well supported by fundamentals, and the reduced participation from US investors in particular, bodes for a continued rally, unlike what we saw in 2011.
Besides this, we also saw all-time highs in the prices of many other assets, including global stocks. The Council’s report finds that gold’s share of assets is low, not only because of the continuing rise in the prices of other assets, but because of the large issuance of financial bonds “collaterals”, which means that the physical restrictions imposed on the supply of gold mean that its price must bear the heavy burden of maintaining its share. Reasonable assets. “We have not seen this happen yet, which is encouraging.”
2024-04-10 19:58:20
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