Commodity Watch – What explains bull-run in gold?

Gold prices are on a record-breaking spree since early March with yellow metal touching an all-time high. The precious metal rose nearly $400 since March to reach an all-time high of $2,431.29 an ounce on April 12. The bull-run has meant that gold has returned 14% in dollar terms so far in 2024, exceeding 13% last year.  
 

Though the current global uncertainties, geopolitical tensions and imminent interest rate cuts are considered ideal conditions for safe haven gold prices to rise, the current rally has surprised many. For one, global uncertainties, geopolitical risks and expectations of interest cuts are nothing new and has been there for some time. If at all, the outlook on interest rate cuts by US Federal Reserve, which is favourable for gold prices, have become muddier with inflation remaining sticky and the world’s largest economy showing surprise resilience.  
 

"The traditional fair value of gold would connect the usual catalysts - real rates, growth expectations and the dollar - to flows and the price. None of those traditional factors adequately explain the velocity and scale of the gold price move so far this year," Goldman Sachs said in a report.

Gold’s relative stability in the face of higher-than-expected US CPI inflation this month, which further pushed back expectations of rate cut, shows that gold’s bull-run is not driven by the usual macro suspects, Goldman Sachs said.

Then what explains the current rally?

The majority of gold upside since mid-2022 has been driven by new incremental physical factors, including acceleration in gold buying by emerging market central banks and Asian retail buying, Goldman Sachs, which in April raised its price forecast for gold to $2,700 per ounce by end of 2024 from $2,300 earlier, said in its report.

According to World Gold Council, central banks continued their buying at a breakneck speed in 2023. Central banks made annual net purchases of 1,037 tonnes in 2023, almost matching the record 1,082 tonnes in 2022. Total gold demand, including over the counter and stock flows, was at a record 4,899 tonnes in 2023, up 3% from the previous year.  
 

The gold buying spree seems to be continuing in 2024. Bank of China reported the 17th straight monthly purchase in March, taking the total gold holdings to 2,262 tonnes. China’s gold reserves increased by 27 tonnes in Jan-Mar.  
 

The performance of gold compared with other assets has also attracted investors to look at gold.

There is another factor for the gravity-defying rise. "The fear of missing out has created a strong buy-on-dip mentality among precious metal traders and investors," Saxo Bank Head of Commodity Strategy Ole Hansen said in a report.

After touching the all-time high earlier in April, gold has seen some corrections as the tension in West Asia eased a bit with Iran saying it has no plans to retaliate following apparent Israeli drone attack. According to Hansen if gold holds above $2,255-2,260, it will send a signal to the market that the recent retracement is nothing but a weak correction within a strong uptrend.  
 

Interestingly, the bull-run in gold is happening at a time when gold-exchange traded funds are facing outflows. According to World Gold Council, global physical gold-backed ETFs witnessed their 10th consecutive monthly outflow in March, losing US $823 million. The outflows are happening at a time when demand from central banks, investors and retail investors are pushing up gold prices. One of the possible explanations is that long-term investors, who bought the ETFs when gold prices were much lower, are booking profits at higher levels.  
 

China and India, the biggest consumers of gold, have entered a dull period due to traditional offseason for gold demand in China and elections in India. According to World Gold Council anecdotal evidence suggests that bullion dealers, manufacturers, and jewellers limit their transactions during elections due to increased scrutiny on movement of cash and gold. In three of the last four general elections gold consumption fell during the election period.  
 

There could be occasional corrections depending on geopolitical situation and economic data. According to IIFCL gold prices are likely to remain strong in the short term at least as there are no signs regarding a substantial easing of uncertainty any time soon.