Gold is gaining momentum as a weaker dollar, Fed rate cut expectations, and trade uncertainty fuel demand. But it’s not just inflation and interest rates — geopolitical tensions and institutional buying are also driving inflows.
At the end of last year we forecast that gold would continue its upward trend and eventually break through the key psychological barrier of $3000 per troy ounce.
Gold’s historical role as a safe haven makes it a preferred asset amid ongoing geopolitical tensions and economic uncertainty. The increasing inflows into gold funds are largely driven by concerns over potential disruptions in global trade due to escalating tariff disputes, as well as conflicts we see now.
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Furthermore, expectations of potential rate cuts by the Federal Reserve enhance gold’s appeal, as lower interest rates reduce the opportunity cost of holding non-yielding assets. Institutional demand, including ETF inflows and record central bank purchases, has further supported gold’s price momentum, with a break above the psychologically significant $3,000/oz level potentially paving the way to $3,200/oz.
There are some longer term factors in play here. The weaponisation of the US dollar and international banking system following the Russian invasion of Ukraine has led to sustained buying of gold by central banks which have cut some of their USD reserves.
Anticipated volatility in gold futures
Even with these fragile market fundamentals and increasing talk of a recession, gold is on a zigzag path and doesn’t appear to be fully benefiting from the heightened uncertainty in the economy, stock markets, or bond markets – The MOVE Treasury bond index is at its highest level since November, and the VIX fear index is at its highest level since August.
Speculators appear to have strengthened their role in driving recent price movements, exploiting periods of high volatility to generate higher returns. Since the beginning of March, we have witnessed a daily increase in open interest in COMEX gold futures contracts, from 489,000 contracts to more than 509,000, representing a growth of approximately 4%.
The Gold Volatility Index (GVZ), which calculates the implied volatility of COMEX gold futures and options, also shows an upward trend. High volatility attracts more short-term speculators, which could leave gold vulnerable to continued relatively high volatility in the coming days.
Expert Alex Tsepaev, Chief Strategy Officer at B2PRIME Group, had this to say:
“As gold, unlike the emerging alternative assets, enjoys transparent and unambiguous legislation, most banks have open declarations to buy as much gold as they want and can. I expect these entities to preserve the present pattern for as long as first meaningful statistical data sheds light on the real situation, showing the degree of damage, if any, to world economy, global trade and inflationary pressures.”
What about the risks of holding gold?
Regarding the risks associated with increased exposure to gold in the current economic climate, it should be said that gold doesn’t generate income like stocks or bonds. It doesn’t pay coupons or dividends either.
If the market reverses into meaningful growth, gold funds might miss out on significant gains from holding gold, so we are discussing the opportunity cost. Furthermore, gold will unlikely become a key performance driver for these funds; therefore, they can preemptively consider it a value storage tool rather than a capital increase vehicle.
There is no need to ‘mitigate’ risks of holding physical gold, as its potential drawdown must be considered negligible vs. its upside opportunity.
Investors also need to bear in mind that a Ukraine ceasefire will take some of the wind out of gold’s sails and could lead to a short term retracement. This could create an opportunity to acquire more gold.
Favourite paths into the gold market for many investors include buying listed gold ETFs on major exchanges or buying bullion directly from reputable providers.
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