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Markets always look best when they’re at their peak. That’s especially true for gold, which is nearing $3,000 an ounce. It’s behaving like a Veblen commodity—a commodity that, contrary to economic law, increases in demand as its price rises. But can that momentum hold, asks Bloomberg columnist Marcus Ashworth.
First, there’s speculation that President Donald Trump’s administration will revalue its gold holdings, currently pegged at $42 an ounce, to the current spot price. That would magically add about $800 billion to the assets on the U.S. balance sheet. The net effect is that less debt will have to be sold, which is good for Treasuries and the dollar, but the logic of that being a boost to gold’s price eludes me, Ashworth notes.
Second, ten Chinese insurers were allowed this month to invest 1% of their balance sheets in physical gold – potentially the equivalent of $27 billion. This rule change had been widely anticipated in gold trading circles for several months. But getting a buying opportunity is far from pulling out the big bazooka, especially when the price is at a record high.
Spot gold price movement per troy ounce. Chart: Bloomberg LP
China’s central bank is widely seen as the biggest buyer of gold in recent years. After a pause of several months, the regulator added 15 tonnes to its reserves in the final two months of last year. The premium for Shanghai-traded gold usually rises as the yuan weakens, but not this year. That suggests Chinese demand is not the current driver of new price peaks. So what is?
According to Vanda Research, an investment advisory firm, these are U.S. institutional buyers diversifying their portfolios to protect themselves from the effects of Trump’s tariffs. The firm also notes that most of this year’s price gains have been made during U.S. trading, not Asian trading. Trend-following funds are looking for repeat gains. But these inflows tend to reverse very quickly if price gains are not sustained.
The difficulties in delivering gold for the Comex futures contract in New York have exacerbated a short-term shorting. Everyone knows that gold is not a good return and is expensive to store, but transporting it from warehouses in London, Toronto or Zurich to New York adds a whole new set of costs. Such situations rarely last long. Nevertheless, U.S.-listed exchange-traded funds are finally seeing a surge in capital inflows after seeing little interest in the gold rally over the past year.
The usual principles driving gold prices have been set aside, with one exception: that the precious metal is a preferred hedge against inflation. For now, the focus is largely on the inflationary effects of Trump’s tariffs – although for now, that is more a political clash of wills than an economic reality.
Yet the core personal consumption expenditure index, which the Federal Reserve tracks most closely, has remained below 3% for the past year. Similarly, five-year forward inflation swaps have hovered near 2.5%. Yes, they are all above the Fed’s 2% target, but Chairman Jerome Powell is calm and still more inclined to ease interest rates.
Deutsche Bank AG analysts estimate that any potential U.S. tariffs and retaliatory measures would add at most 0.4% to the U.S. consumer price index. That explains some of the gold’s appreciation, but not the 45% jump in price over the past year.
Trump is aiming to maintain the dollar’s status as the world’s reserve currency, not to help a competitor. Gold is typically inversely correlated with the dollar, and the high yield on U.S. Treasury securities is usually gold’s kryptonite. Any reduction in US Treasury yields should ease the fear factor that is driving gold higher.
There is also no apparent economic or monetary policy shocks coming. If anything, the geopolitical environment is calming down. Certainly, equities are showing very little concern about the risks of new tariffs – Germany’s DAX has even topped the list this year, despite the country being a potential target of Trump’s wrath.
Gavekal Research points out that while all the bullish arguments for gold are crystal clear or well-known, the bearish catalysts are not. Peace agreements in Ukraine and the Middle East would break the gold price’s momentum. It is also worth noting that the precious metal’s usual companions, such as miners of physical gold and some other precious metals such as silver, are not in a similar position.
Gold may be a hot asset right now, just as Bitcoin is taking a breather, but a failure to reach or stay above the $3,000 level for long could take away some of its value.
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