The higher prices have been fuelled by expectations that the US Federal Reserve will lower interest rates this year, typically an environment that reduces the opportunity cost of holding the metal. Meanwhile, messy conflicts in the Middle East and Ukraine support demand for safe-haven assets, and purchases by global central banks add to a bullish backdrop.
The current momentum is a signal to increase holdings in gold, according to Rajeev De Mello, global macro portfolio manager at GAMA Asset Management. Prices might now be vulnerable to a slight correction, he said, but any pullback was likely to bring in more buyers.
“It’s a relatively small market, and it can squeeze higher very fast,” he said, comparing it to the size of US government debt securities. “It’s a very momentum-driven asset, really.”
Gold’s sharp and sustained move higher has vexed some observers because it’s happening at a time when real yields remain elevated. That’s typically a headwind for precious metals because they don’t pay interest.
But investors have not been deterred. In New York’s Comex gold futures market, money managers are placing more bullish bets on gold, with net long positions rising to a near four-year high in the week ended April 2.
One key factor has been enthusiasm among central banks, encouraging buyers such as Matthew Schwab, head of investor solutions at Quantix Commodities with $US933 million under management.
The firm’s long-only fund has been overweight gold since 2022, with bullion’s weighting about 30 per cent – compared with about 15 per cent in the Bloomberg Commodity Index.
Purchases by central banks totalled more than 1000 tonnes in 2022 and 2023 with much of that led by economies, particularly China, where efforts to diversify away from the US dollar have accelerated.
“What I think is really, really bullish about gold is that those ounces will be taken off the market and never come back,” said Duncan MacInnes, investment director at Ruffer Investment Co. “And that’s clearly very different to the [exchange traded funds] where ultimately everyone’s a trader of it.”
Last month, he increased his exposure to gold and silver to roughly 8 per cent across his two portfolios, which combined have about $US3 billion under management.
There’s one further reason to expect another boost, according to investors. Unusually in this environment, investor demand for gold-backed exchange traded funds – typically a key driver for bullion – has yet to materialise. In fact, total holdings are close to the lowest level since 2019, according to data compiled by Bloomberg.
According to Ben Ross, who manages about $US410 million in commodities strategies at Cohen & Steers, that’s largely explained by investors chasing returns in the money market. But once the Fed starts cutting interest rates, that will eventually trigger fresh inflows into ETFs and boost gold prices further.
That, according to Ruffer’s Mr MacInnes, will create a very squeezed market.
Fed fund futures are currently pricing the first interest rate cut by the US central bank in July or September of this year.
Of course, not everyone is sold on bullion’s continued run. Jay Hatfield, chief executive officer of Infrastructure Capital Advisors, has no plans to add gold in the next 12 months, opting instead for equities as central banks start to cut rates.
There are small-cap stocks trading at “historic lows on a relative multiple basis” that will do much better than gold, he said.
Near term, the sudden exuberance in the market could induce a correction. Gold’s rapid ascent has lifted the 14-day relative strength index to a level that indicates prices have risen too far, too fast.
“There’s quite a bit of expectation going into the current price,” said Darwei Kung, head of commodities and portfolio manager at DWS Group. Mr Kung is still bullish into the second half and expects more participants to increase allocations.
