Gold gave back a little more of its y-t-d gains in December, finishing down 1% on the month, but up 26% on the year; said in the Gold Market Commentary, Published by World Gold Council (WGC).
According to WGC’s Gold Return Attribution Model (GRAM), the primary driver for gold’s decline was a strong rally in the US dollar index (opportunity cost FX) which finished the year at its high. Softening gold’s drop were a rise in breakeven inflation expectations and the Geopolitical Risk index (risk & uncertainty), likely on the back of martial law declared in South Korea, as well as small global gold ETF inflows (momentum).
Global gold ETFs eked a US$778mn (4t) gain in flows thanks to strong Asian ETF buying, significantly offsetting outflows in North America during December. Those outflows were quite benign given the weakness in November and the prospect of profit-taking following such a strong year.
A positive sell-side outlook for gold probably helped constrain a bigger end-of-year shift out of gold.1 Profit-taking also likely occurred in futures, where somewhat extended managed money net longs shed US$4bn (-49t) over the month taking total net positions down to US$65bn (764t).
January jitters on,
1: Hawkish Fed spurs profit-taking but also signals interestrate uncertainty,
2: Bonds are set to stay on shaky ground, and this should help gold at the margin &
3: Short term, gold may need to consolidate in Q1 2025 as technicals signal that it resides in overbought territory.
Fed puts punch bowl back in the fridge A 25bps Fed policy rate cut in December, doused with further hawkish guidance, resulted in sizeable intraday wobbles in equities, US Treasuries and gold. The S&P 500 fell by 3%, and the 10-year Treasury yield marked the largest FOMC-meeting move since 2013. Gold dropped by over 2%. Undoubtedly, the Fed’s sober messaging prompted some investors to take profit following a stellar year for equities and gold, with tax-loss selling an additional incentive to cut equity exposure.
A high rate of uncertainty The reaction probably also reflected some pent-up uncertainty that markets, as well as the Fed, soon face a change in personnel at the helm of the US economy come January 20. While the FOMC members are somewhat confident in where interest rates will be at the end of 2025 – they are unusually divided on where rates will be at the end of this cutting cycle,
Interest rate uncertainty is also reflected in the elevated level of the MOVE index – an options-based measure of expected (implied) bond volatility. This is partly the result of two months of positive inflation surprises in the US. But elevated debt and deficits are arguably also factors. Interest rate uncertainty should favour gold relative to bonds as it raises their associated premia, at least through January with debt ceiling wrangling and the US presidential inauguration on the cards.
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