A huge day for the gold market – the chase is on

The wash-up is that we’ve seen a new ATH in gold (XAUUSD), with the price pushing into $2469 and having the second biggest gain of the year (+1.9%). We’ve also seen new ATHs in XAUJPY, XAUSGD and XAUCNH, with XAUAUD and XAUEUR also looking strong as well – so the momentum in the yellow metal is not just a USD story.

Technically, gold has held a range of $2450 to $2285 since mid-April, but on the day, we see price breaking out topside emphatically, and where a measured move of the range suggests a target closer to $2600. We see that the price has pushed to a 2.11% premium to its 5-day MA, and 2 standard deviations above the YTD average, which speaks to the strength of the move.

The clear question is whether this can now kick into $2500 in the near term.

The ‘flow show’ driving the rally

A strong US retail sales print saw US Treasury yields rise a touch, which resulted in gold falling $14 to $2429. The selling didn’t last long though, and with the reversal lower in US Treasury yields, the USD found renewed selling activity, with gold seeing that as the point to stage a solid reversal higher.

Looking at volumes traded through the futures exchange, and we can see big accumulation volume into and after the post-US retail sales sell-off. This was then backed by big buying and accumulation flows when gold futures traded through the prior ATH (in front-month futures) of $2454, so one can argue that systematic momentum and trend-following players (CTA’s) have had a huge hand in driving the futures and spot gold moves today.

In the ETF space, on the day we saw the GLD ETF trade 11.048m shares, more than double the 15-day average. Flow-wise, and we can better inflows into the GLD ETF of late and that suggests investors are clearly warming to the evolving investment case.

The options market is also speaking out, with gold 1-week call implied volatility trading at a 1.5 volatility premium to 1-week puts. This is not yet at extreme reads, but the relative demand for short-dated call options is a sign of increasing bullish sentiment. It also results in market makers (who sold the calls) having to dynamically hedge their exposures as the price moves higher – again, that just perpetuates the move in gold higher.

The fundamental case behind the rally

Momentum and options-related flows aside, the question we hear from clients is what fundamentally is driving this move to new highs in gold?

There is typically seldom one reason, but often many factors at play:

• The market has unwavering confidence that the Fed is about to embark on an easing cycle from September – as Fed rate cut expectations increase, gold has held a close, albeit inverse relationship with the level of rate cuts priced for the December FOMC meeting, and further out into late 2025.
• Traders have seen that in 3 of the past 4 Fed easing cycles gold has rallied strongly in the six months after they ease. 4 cycles is perhaps not a huge sample size but enough for some to front run a potential re-run of form.
• US real rates (i.e. US Treasury bonds adjusted for expected inflation) have printed new cycle lows, with the US 10-year real rate now at 1.89%. Gold has no yield, so when the real return in Treasuries falls, gold looks relatively more attractive.
• US retail sales aside, the US economic data is moderating – while still a low probability, investors are seeing some attraction to increase gold weights in the portfolio against a possible recession and equity drawdown.
• A hedge against rising protectionism – The betting markets price the prospect of Trump becoming President has risen to nearly 70%, and with JD Vance as Trump’s running mate, the prospect of a hard-lined protectionist approach towards China, Mexico and potentially Europe, has many questionings what this could mean for global trade and inflation.
• A hedge against fiscal recklessness – should the Republican Party take the White House, House of Reps, and the Senate (i.e. a ‘Red Wave’) we could see a significant blowout in the US govt deficit.
• The PBoC may have cut back on adding gold to its total reserves, but other EM central banks remain big buyers of gold, as do retail investors.

There are obviously other factors in play, and gold wears many hats. However, the fundamentals have clearly shifted to offer investors increased reasons to reweight gold holdings in the portfolio, and this has led to price-sensitive funds chasing the upside. And with broad-based positioning and sentiment not near extremes $2500 could well be tested soon enough.