Gold prices have surged since the end of February, with the LBMA Gold Price PM currently trading at US$2,180.45 per ounce as of March 11th. This marks a 6.5% month-to-date increase. Gold has achieved record highs for six consecutive days and came close to reaching US$2,200 per ounce during intra-day trading last Friday, March 8th.
The significant rise in gold prices has garnered attention from market participants. Initially, the catalyst was attributed to a weak ISM print in the US on March 1st, which resulted in a decline in bond yields and the US dollar.
However, while this factor provides some explanation, there are other drivers behind gold’s recent movement. Analysis conducted using a weekly version of the Gold Return Attribution Model (GRAM) suggests that several factors contribute to gold’s performance:
Weakness in the US dollar against both developed and emerging market currencies.
Increased market volatility.
More bullish investor positioning in the COMEX market.
A decrease in 10-year US Treasury yields.
Despite the insights provided by GRAM, a notable portion of gold’s recent performance remains unexplained. Like any model, GRAM relies on historical relationships, which may not fully capture current market dynamics. Therefore, several other factors could potentially elucidate the additional increase in gold prices.
Gold’s swift ascent, surpassing various technical resistance levels and psychological thresholds between US$2,050 and US$2,100/oz, likely triggered the covering of short option strategies and spurred additional tactical investor engagement. While COMEX’s net long positioning, employed by GRAM, operates with a delay and may not currently reflect this development, it could potentially be inferred from more contemporaneous data on Open Interest.
Furthermore, activity in the over-the-counter (OTC) market, which may not be fully captured by COMEX positioning or gold exchange-traded fund (ETF) flows, likely contributed additional momentum to the market.
WHAT THE FUTURE HOLDS?
Gold benefited from robust Chinese demand during the Spring Festival at the start of March. Additionally, central banks have maintained their trend of purchasing gold in 2024, as observed in previous reports. This consistent buying pattern by central banks, often reported retrospectively, has contributed to gold’s strong performance in recent years, alongside geopolitical tensions.
Looking ahead, upcoming expiries in options markets could attract further investment flows if the gold price sustains its position above significant psychological levels like US$2,100/oz, especially amidst ongoing weakness in the US dollar.
Conversely, the upcoming US Federal Open Market Committee meeting will provide insight into the Federal Reserve’s inclination to ease monetary policy, particularly in light of downward revisions to past non-farm payrolls reports and a slight increase in unemployment.
Although a rate cut in March is not currently anticipated by the market, a more hawkish stance from the Fed could pose short-term challenges for gold. Moreover, swift fluctuations in the price of gold tend to dissuade consumers of gold jewellery, as they may opt to postpone purchases until volatility abates.