Gold continuing to set fresh record highs, seemingly oblivious to the growing headwinds

Key Takeaways

• Gold pushing ahead in uncharted waters...
• ...strong momentum means it is managing to ignore current headwinds
• Is the latest run away in price last-minute hedging against the US election? We don’t think it is due to de-dollarisation as central bank purchases have slowed in recent months
• Markets rarely travel in such straight lines for so long, so there is growing risk of a correction
• That said, the overall bullish case for gold remains strong as the geopolitical situation is deteriorating with North Korea now helping Russia in Ukraine and Israel and Iran attacking each other. On top of that US debt looks to grow even more and if de-dollarisation does eventually gather pace then that would become a major headache for the US, especially with its ability to run such a large deficit
• Silver prices have started to play catch-up, and prices are still 32% below their 2011 record high
• Lower US interest rates and Chinese stimulus, to boost demand for industrial precious metals

Gold continuing to set fresh record highs, seemingly oblivious to the growing headwinds

• The buying is so determined that it has so far not been influenced by the sharp rebounds in the US dollar and the US treasury yields
• But, geopolitical risks have escalated with North Korea sending troops to help Russia fight in Ukraine and as Iran joins the fighting in the Middle East…?
• ...so far the war has not targeted the Middle East oil industry ?
• Funds have reduced their exposure slightly, but ETF buying continues with holdings increasing for the sixth month in October – there seems potential for significantly more buying given the growing risks the world faces
• China has been a stronger buyer of gold over the past two years, high prices and a rebounding equity market may lead to rotation from gold to equities
• There is much talk that gold is being bought as de-dollarisation gathers pace amongst central banks, but central bank purchases have been slowing this year, suggesting this is not the main driver

Markets rarely travel in such straight lines for so long, so there is growing risk of a correction"

Silver has for so long lagged gold, but that seems to be changing now

• Silver prices are up 46.5% since the beginning of the year, gold prices are up 35%
• Chinese stimulus and weaker US monetary policy will boost industrial production, which bodes well for silver demand

Silver prices are up 46.5% since the beginning of the year, gold prices are up 35%"

PGM prices also rally on prospects for better industrial demand

• PGMs to benefit as battery electric vehicle uptake slows, meaning demand for auto catalysts holds up stronger for longer
• Palladium saw oversized gains compared with platinum in October, as the US was trying to sanction Russia palladium

Gold’s upward price momentum pushes through mounting headwinds

The persistence of the rally in gold prices is remarkable, with the latest high being $2,790.90 per oz, up 5.9% from the end of September’s level of $2,635 per oz. This puts the year-to-date gain at 35%. The rally has significant momentum and that can be a strong driver in its own right. While many of the bullish drivers are known about and are justified, questions are being raised as to why gold prices are still rising given the headwinds the market faces. Has another structural driver emerged, that of de-dollarisation? While everyone is intrigued by a conspiracy theory it seems unlikely that de-dollarisation is the main driver now. Central banks have been taking more interest in gold in recent years, if anything the pace of buying has slowed in recent months, which is what you would expect given the strong price rise. Therefore, the slowdown in central bank buying does not support the idea that there is a surge in de-dollarisation buying, which raises the question what is causing buyers to chase prices higher so aggressively? Chasing prices higher is often done by those in destress, so it maybe that some large-scale OTC option trades are at play, and delta-hedging has become the consistent source of buying – this would help explain why some of the more usual correlations with the dollar and US treasury yields have broken down.

Has another structural driver emerged, that of de-dollarisation?"

Slower central bank buying puts a question mark over de-dollarisation

While central banks are still buying gold, the pace has slowed. Last year, central banks added 1,037 tonnes of gold to their reserves, this followed a record amount of 1,082 tonnes in 2022. In the first three quarters of 2024, central bank buying totalled 694 tonnes, according to the World Gold Council and with the People’s Bank of China (PBoC) not reporting any additions to its gold reserves since May, it seems likely that central banks net purchases will be considerably lower this year than last. It could be that other sovereign wealth funds are buying and the purchases are not being reported, but that remains to be seen.

Read the full report here.

Disclaimer: This content is for your information only and does not constitute financial advice or recommendation and should not be considered as such. Although reasonable care has been taken in preparing the information set forth in this communication, Sharps Pixley accepts no responsibility for any errors it may contain or for any losses allegedly attributable to this information.

Sharps Pixley is a limited company registered in England number 06629106. Registered address: Sharps Pixley Ltd, 54 St James’s Street, London, SW1A 1JT.