Gold has surged since March, and Wall Street can't understand it

The situation of rising gold prices often occurs after the Federal Reserve opens a rate-cutting cycle. If the market delays its expectations of a rate cut by the Federal Reserve, nominal interest rates rise along with a stronger US dollar, and the price of gold should fall.

However, the current situation is that gold has been "soaring" this year, along with rising US bond yields and a stronger US dollar, which is in clear disagreement with the past negatively correlated pricing logic. As of the time of writing, spot gold continues to rise, up 0.75% intraday, hitting a record high of $2353 per ounce, with a year-to-date increase of over 11%.

The non-farm payroll data released on Friday showed that the US labor market remains strong, with strong job growth potentially leading to a further delay in the Fed's rate cut timing. Futures market trading expects the probability of a Fed rate cut in June to drop to 50%, US bond yields have risen to a high of 4.39% so far this year, and the US dollar index has also rebounded slightly after a continuous decline.

Executives and analysts from major Wall Street investment banks have given various answers as to why gold has risen sharply at this time, including: central banks around the world are repositioning gold as a reserve asset; hedge funds are betting on a shift by the Fed, with US bond yields about to decline; quantitative traders are attracted by the rise in gold prices; the market is concerned about stubborn US inflation and a hard landing; global geopolitical risks and unpredictable macroeconomic outlook...

Media analysis points out that this round of significant gold price increase may no longer be traded according to traditional macro central bank policy logic. The current gold price is diverging from the size of gold ETFs, and the gold purchase demand of major central banks cannot fully explain the historical high gold price.

Ole Hansen, Head of Commodity Strategy at Saxo Bank, pointed out that this rise in gold prices goes against many conventional ways of thinking, with the market narrative shifting towards inflation rebound and a possible hard landing, mixed with a lot of geopolitical uncertainty and central bank demand.

Global Central Bank Gold Purchases

Wall Street News previously mentioned that over the past two years, central banks around the world have rapidly increased their demand for gold, with gold holdings increasing by over 1000 tons for two consecutive years, breaking the traditional demand structure for gold.

David Rosenberg, a top US economist and President of Rosenberg Research, pointed out that the recent record high gold price is not without the push from the demand side, thanks to central banks around the world repositioning gold as a reserve asset. In addition, many people are turning to gold as a safe haven when resisting specific economic risks.

On April 7th, the State Administration of Foreign Exchange of China announced the scale of foreign exchange reserves at the end of March 2024. In March 2024, China's official gold reserves were 72.74 million ounces, an increase of 160,000 ounces from the previous month, marking the 17th consecutive month of increasing gold reserves Analysts generally believe that the global central bank's gold purchases have a certain impact on the price of gold, but should not be considered the main or only reason. Data shows that the overall gold price has fallen in 2022, indicating that global central bank gold purchases have not supported the gold price.

What is the market buying?

Data from the World Gold Council shows that despite gold prices hitting new highs again, global gold ETFs have seen cumulative outflows of about $5.7 billion this year, with global physical gold ETFs experiencing outflows for the eighth consecutive month. The current gold price and the size of gold ETFs are diverging.

Nate Geraci, President of ETF Store, said this is one of the most unusual phenomena he has seen in the ETF field, "What's particularly interesting is that demand for gold in other channels has been very strong, such as central bank purchases and direct purchases by individuals and private investors."

Citigroup explained that this phenomenon may be because long-term investors who entered the market early are now selling their gold ETFs to take profits, which is why the net inflow of gold ETFs is relatively weak. In addition, despite continued outflows of funds, the gold price has not been greatly affected, indicating that there are other buyers in the market purchasing this gold.

Joe Cavatoni, head of the World Gold Council's ETF platform, pointed out that despite outflows in gold investments through ETF channels, demand for physical gold still exists and is being absorbed by other market participants:

"There are other investors buying physical gold, so this has not had any impact, guess where they went: they entered the over-the-counter trading market or were bought by central banks."

Why buy gold now?

Since the beginning of this year, Wall Street's expectations for the number of rate cuts by the Federal Reserve have been continuously decreasing. Under the conventional framework, if the expectation of U.S. easing shifts, nominal interest rates rise along with a stronger dollar, gold prices should fall.

Media analysis suggests that one possible reason for the rise in gold prices is that some gold investors are starting to focus on the risk of a hard landing for the U.S. economy based on recent data and are eager to buy physical gold as a hedge.

David Einhorn, founder and president of Greenlight Capital, a billionaire investor, believes that due to the Federal Reserve's difficulty in controlling inflation, it may maintain its tight monetary policy for a longer period than expected, potentially posing downside risks to the economy. Based on this, he is increasing his investment in gold.

Einhorn said, "We own far more gold than GLD. We also have physical gold, gold is one of our important investments." He further explained, " Our country's monetary and fiscal policies are generally leaning towards easing, which will inevitably lead to deficit issues. Investing in gold is a way for us to hedge against potential adverse situations in the future."

Media analysis points out that the above explanation can also illustrate the change in the relationship between the gold price spread and the Federal Reserve interest rates: why the gold price spread (the price difference between London spot gold and forward contracts) would be abnormal when interest rates are high: In recent weeks, as the price of spot gold has soared, the percentage yield between London spot gold and 3-month forward contracts has unusually fallen below the Federal Reserve interest rate. Historically, this situation only persists when interest rates are low or about to be significantly reduced. Investors are rushing to hold spot gold to hedge against potential volatility