It was a notable session in the gold market on Monday. Prices soared towards a new all-time high even though gold's usual drivers did not budge.
The US dollar was stable, as were US bond yields, and demand from safe-haven seekers was yet to show signs of picking up. Instead, gold appears to have received a boost from Bitcoin, which is approaching its own all-time high, partially driven by an increasingly optimistic market environment.
This optimism appears to be spilling over into the gold market, although the fundamental context is very different from that of Bitcoin. Barring a US recession and a related reversal of US monetary policy, we believe gold prices are on an unstable footing and see more downsides than upsides in the medium to long term. That said, near-term price risks are tilted to the upside.
Gold is approaching its all-time highs again. Prices soared past $2,100 per ounce on Monday, which in itself is notable in the current economic environment. Recession risks have been declining in recent months and expectations related to a rapid reversal of monetary policy have been recalibrated.
Monday's rally was even more notable as none of gold's usual drivers moved. The US dollar was stable, as were US bond yields, and demand from safe-haven seekers was yet to show signs of picking up.
Instead, gold appears to have received a boost from Bitcoin, its digital counterpart, which is approaching its own all-time high of over $68,000.
While demand for Bitcoins has been very strong since the launch of physically backed exchange-traded funds in the US, this is very market-specific and should not normally have any impact on gold.
Demand for gold, meanwhile, has been subdued at best. While we generally believe that a very favorable fundamental mix of strong demand and slowing supply are in the driving seat for Bitcoin, a good portion of the recent rally must also be attributed to an increasingly optimistic market environment.
This seems to be spilling over into the gold market right now. Gold fundamentals are much less favorable in our view. Safe haven seekers remain on the sidelines, recognizing the resilient US economy and the fact that a quick reversal of US monetary policy is highly unlikely.
Lower interest rates are not enough; such an interest rate reversal would need to be accompanied by a recession to provide a lasting boost to prices.
Our analysis of all interest rate cut cycles since 1975 shows that gold prices rise on average 15.5% after 12 months when the first rate cut of a cycle is followed by a recession.
If a recession does not follow, prices drop by 7% on average. While this generally supports our view that gold prices are on an unstable footing and that there should be more downsides than upsides in the medium to long term, we also need to recognize that due to the prevailing bullish market environment, short-term price risks term are tilted upwards. However, we believe this rally lacks fundamental support.
Carsten Menke, Head Next Generation Research, Julius Baer
