Gold's Break From Traditional Drivers May Point to New Highs
Gold's rally to record highs suggest it's broken free from its traditional drivers. That would typically signal rising risk of a downward price correction, yet an increased willingness to hold gold in the face of heightened geopolitical tension and further polarization likely should Donald Trump be elected US president, could mean gold pushes higher into the year-end. (11/05/24)
1. Gold's Break From Fair Value Flags Looser Drivers
If gold were still paying attention to its traditional drivers, the price would be nearly 19% lower at just over $2,250 an ounce. Yet, though the anticipated directional relationships still hold, their influence doesn't seem as strong as it was before the pandemic. Even in a scenario where real interest rates fall, the greenback weakens, China's equity market falls and speculative interest increases, the metal still looks overvalued by just over 10% according to our model. Conversely, the most influential factor on gold is the US equity market, yet not in the traditional sense of gold being a hedge against a falling equity market. Since Russia's invasion of Ukraine, gold has been positively correlated to the S&P 500, suggesting that in the near term, a sharp downward correction in the S&P 500 could be detrimental to gold.
2. Resilient Stock Market May Maintain Gold's Momentum
In contrast to the pattern established over the past decade -- where gold outperforms in a risk-off environment, as depicted by a rising S&P 500 price earnings ratio (PER) -- the metal has been positively correlated with a rising S&P 500 PER since Russia's invasion of Ukraine. Though the contentious US election may keep nerves high in the short run, the combination of easier Federal Reserve policy and surging earnings may support stocks and spur a further rotation toward some of the market's former laggards as the year closes out, according to Bl chief equity strategist Gina Martin Adams. This combination may prove to be a positive influence for the gold price, and we only see a risk to the metal's momentum in the event of a sell-off.
3. Slowing Inflation May Become a Modest Headwind
The US CPI print in September pointed to a moderation of inflation and, though it may be too early to call the end of the post-pandemic inflationary era, this could prove a modest headwind for gold. The metal has been a good store of wealth, tracking well ahead of inflation over long periods of time. On an inflation-adjusted basis, gold has traded close to current spot on two previous occasions -- after the global financial crisis and during the initial stages of the pandemic.
Methodology: The US CPI Urban Consumers index serves as a store of wealth indicator in our model, while the 10-year TIPs serves as an opportunity cost indicator. The dollar serves as both a risk and a currency comparison for gold.
4. Gold Prices In Fed Cuts; Real-Yield Link Rebased
Gold has weathered the rise in real yields far better than historical trading patterns. Such tolerance of a higher interest-rate environment seems to have rebased the relationship and is the main reason our fair-value model shows that the quasi-currency is overvalued. That's not to say that gold hasn't been responsive to changes in real yields, or at least the anticipation of the Fed starting a rate-cut cycle, yet at times the metal has been more sensitive to alternative signals in the short term, such as Chinese economic indicators.
5. De-Dollarization May Boost Gold Over Time
Gold's sharp upward move in late February and October may have signaled a break from the metal's usual inverse correlation with the dollar, and we expect that relationship may continue to weaken over time. Audrey Childe-Freeman, BI's chief G-10 currency strategist, thinks the dollar's status as the ultimate global reserve currency is intact, but evolving geopolitics, along with China's push to promote the yuan globally, keep FX regionalization and de-dollarization topical themes. Domestic US politics and recurrent debt-ceiling concerns also weigh on the long-term outlook for the greenback. Should Donald Trump be reelected and potentially ramp up isolationist policies, that could intensify the structurally driven risks to the greenback's hegemony, increasing gold's attractiveness as a "neutral" currency.( Contributing Analysts David Zhong)
Source : Bloomberg
