Gold Market Commentary for the March review, World Gold Council (WGC) say, fundamentals remain in place! The current run-up in price has taken many by surprise. Paraphrasing an old adage, shouldn’t high prices for a commodity cure high prices? Gold is not a commodity in the traditional sense and primary production’s response may have only limited impact on price.
The willingness to hold and reluctance to sell – given current extreme policy uncertainty – could generate real momentum. By historical standards, the current rally isn’t particularly large or long. And comparing the current rally to the recent 2011 and 2020 peaks highlights that, relatively speaking.
The fundamentals look more solid;
1: US gold ETFs are a considerably smaller share of all US ETF assets than during 2011 as ETF buyers have been on the sidelines for the best part of four years they are not overbought.
2: Real yields are higher and above their long-run average, suggesting more downside than upside risk for yields – and vice versa for gold prices.
3: Forward equity price-to-earnings remains high, and that provides capacity for further downside to equities should an economic slowdown and earnings downgrades worsen, especially in the current geoeconomic conditions, a boon for gold’s safe-haven appeal.
4: Credit spreads are considerably tighter than during the two previous peaks. Again, widening risks trump contraction risk, and are also gold supportive.
5: The dollar remains elevated relative to prior periods even if it has weakened since the start of the year. With the Trump administration favouring a weaker dollar and the uncertain effect of tariffs, this could serve as an additional tailwind for gold.
“But we also caution that there are risks for the gold price after a rally such as this in such a short space of time, said, WGC. Treasury managers at central banks could prudently slow their pace of buying given the price rally, as we saw with some central banks last year.
While consumer demand adapts to higher prices eventually, the speed of price moves is like to dampen net buying in the near term. A liquidity-crunch could negatively affect gold as the most liquid assets are sold to meet margin calls.
Additionally, geopolitical and policy nervousness is quite elevated, particularly given significant uncertainty about tariffs and its effect on market volatility, which is likely adding a meaningful premium to gold prices. Any resolution could bring that premium out as we have seen in previous historical periods.
In sum…the extent and speed of gold’s rally has drawn out comparisons to previous peaks. While there are headwinds that the gold market will naturally face in this environment, our analysis also suggest that current macroeconomic conditions are quite different to prior periods when the gold market reached previous highs.
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