The 2024 Gold Enigma

Commodities | Apr 11 2024

US bond yields have rallied back hard, which would typically send the gold price lower. So why has gold rallied hard too?

-US ten-year yield has rallied back to 4.5% from under 4%
-Yet the USD gold price has rallied solidly
-Physical demand as a safe haven
-Can gold keep going?

By Greg Peel

Before March, 2022, the Fed began hiking its funds rate in a desperate catch-up attempt with the runaway rate of inflation, sending the US ten-year bond yield from around 2.50% to over 4%. In late 2021, gold was trading around US$2000/oz. By mid-2023, gold was trading around US$1600/oz.

It was around that time the US ten-year yield peaked at over 5%, as the Fed threatened further rate hikes in the face of elevated inflation. But inflation had begun to recede. Only then did the Fed “pivot” towards a more dovish stance, and markets began to price in the first rate cut.

By January this year, the market was pricing in six rate cuts in 2024. The US ten-year yield fell back to under 4%. Gold rallied once more to US$2000/oz.

The moral to this story is that the gold price is beholden to US yields, notwithstanding its “safe haven” status. But since mid-February, a funny thing has happened.

The Fed’s more dovish stance was more to do with not hiking again than it was to do with cutting rates in any hurry. Gradually, the market began to price in fewer and fewer rate cuts in 2024 – from six, to three, and now to two or even one. Or even none. The US ten-year yield rallied back once more and it has kept rallying, all the way to 4.5% today, but the gold price has also rallied, all the way to US$2350/oz.

Stop, you’re going the wrong way.

US ten-year yield %:

USD gold price/oz:


The war in Europe, underscoring Russia’s imperialist intentions, the war in Gaza, making the Middle East a cauldron of potential conflict, China’s threat to (one day) invade Taiwan, and concern over who might be the next US president, have led to gold’s safe haven status trumping (pardon the pun) movements in US yields.

At the end of the day, the gold price is dependent on a balance of demand and supply, and with respect to the above, global central banks have been the major buyers in 2024.

Central banks purchased 39t of gold in January, ANZ Bank economists note, setting a strong base for demand. Heightened political and geopolitical risks will keep the backdrop conducive for official purchases in the 750-800t range.

There are no supply issues to explain higher prices, suggests Rosenberg Research, total gold production is up, and elevated marginal production costs are putting a floor on the price.

On the other side of the price equation, physical demand accounts for a good portion of the recent price action, Rosenberg notes. Central banks are actively increasing gold reserves as the global political economy evolves, and there is strong retail demand in key emerging markets. Gold’s role in microchip production is also providing a healthy bump in demand.

Beyond physical demand, elevated uncertainty over geopolitics, the shaky global real economy, and the developed world’s “thumping fiscal hangover” are supporting precautionary and speculative demand.

With an easing cycle on the horizon, global growth weak and looking weaker, and inflation on its last leg of decline, Rosenberg is of the view the tailwinds blowing gold to new highs are about to get a lot stronger.

Further to Go?

While the sharp run-up in the gold price is showing a degree of overvaluation at present, if Rosenberg includes a baseline Fed cutting cycle to a neutral rate in its model, the outlook for gold is up a further 10%.

But that’s assuming a global “soft landing.” If Rosenberg models the harder landing the analysts believe is coming, to an average-sized recession, they have gold moving easily 15% higher, up to US$2550/oz.

And that’s before one considers any other potential supports, such as geopolitical tension, election risk, fiscal issues, or further supply constraints. The materialisation of any of those risks on top of the easing cycle puts US$3000/oz in play.

Any well-diversified portfolio should contain gold, says Rosenberg, and at present the analysts recommend an “aggressive overweight”. That will act as a hedge against geopolitical and fiscal risks, offer a safe harbour against a breakdown in the equity bull-run, and give positive exposure to the coming easing cycle and period of US dollar weakness.

While speculators have increased their bullish bets recently, positions are not matching the intensity of the latest price rally, ANZ’s economists note. Moreover, disinvestment in gold-backed exchange-traded funds has been continuing.

A lean level of investment in gold should be seen as a potential driver, suggests ANZ. This not only limits scope for a heavy liquidation, but also leaves ample room for fresh buying. Investment demand will be crucial this year to mitigate any physical demand losses due to higher prices.

While physical gold demand has been holding up well since 2021, ANZ believes the sharp price rally is likely to temper discretionary gold buying in 2024.

The recent price rally lifted well above ANZ’s forecast, so a retracement is likely in the short term, the economists believe. Having said that, they reiterate a long-term positive view and adjust their year-end price target to US$2300/oz from US$2200/oz.

A look at the technicals suggests an overbought price level, hence ANZ suggests recent consolidation could end in a healthy price correction towards US$2100/oz.

Morgan Stanley acknowledges the current trendline for gold implies less sensitivity to real yields, but a rising safe haven premium leaves the price at a higher absolute level.

Gold looks fairly priced for now, says Morgan Stanley, but as we get closer to Fed rate cuts, the analysts believe the direction is more likely up than down.


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