Blow-Off Top in Gold? Price Hits New Record High 5 Days Running
Friday, 3/08/2024 13:56
Is this dramatic? Does it mean gold price is topping...?
The PRICE of GOLD set another fresh all-time high at Friday morning's big precious metal auction in London,
writes Adrian Ash at BullionVault.
That makes it a run of 5 days for new record gold prices at the global bullion market's daily benchmark. Gold today also set a 5th consecutive day of record highs in Shanghai too, taking the wholesale bullion price 5.0% higher in just 1 week for the precious metal's No.1 mining, importing, consumer and
central-bank gold buying nation.
Who's driving this jump? Why now? And what does analysis of the history of dramatic jumps in gold suggest might come next for the bullion investment price?
Western gold investment
First, make no mistake: There is no gold rush among Western investors right now, not in physical bullion and not outside leveraged betting through futures and options contracts.
Gold ETFs such as the giant GLD and IAU continue to shrink, now back to pre-pandemic size. Coin shops are cutting both their premiums and buy-back prices to try stemming and clearing the flood of customer selling. BullionVault users have now
taken profit in gold net-net as a group for a record 6 months running.
Gold futures and options
In contrast, trading in gold derivatives has suddenly switched very bullish, having been very muted early last week. Net of bearish bets, the bullish position among 'Managed Money' traders (on data from US regulators the CFTC) was 25% smaller than its 2023 average and only two-thirds its average size (65%) of the past 10 years.
We won't know this week's long/short data until this evening. But on average since last Friday, data from the CME derivatives exchange says that the daily trading volume in Comex gold futures has jumped 68.0% from its daily average across the previous 3 months. In options contracts (which are more leveraged, more speculative, more risky) it's leapt by 102.2%, setting the highest daily average since mid-October (when gold prices rebounded from sudden multi-month lows) and coming within 5% of its highest since the all-time records of March 2020 (when the Covid crisis spurred
record-heavy Western gold investment).
This week's jump in the speed and size of Comex trading suggests that one or more hedge funds or other hot-money speculators – wanting to bet on a recovery in US Fed rate-cut expectations – decided that gold options offered the biggest delta. So far, that looks a smart bet, and it contrasts sharply with continued profit-taking in vaulted bullion investment as well as the outflows from US and European ETFs backed by gold.
(
What about 'short-covering' driving the price jump, as some analysts suggest? Speculators as a group weren't wildly bullish gold on last week's CFTC data, but they were net long as a group. More plainly, gross short positions were not excessive by any measure. The Managed Money category on Tues 27th Feb's figures held total short positions in futures and options 10% below the 2023 average and 14% smaller than the 10-year average.)
Physical gold outside the West
Underpinning the surge in gold investing prices, note that the physical-market benchmarks in both Shanghai (entry-point into China, gold's No.1 consumer market) and in London (heart of the world's gold bullion storage and trading network) have risen rather than fallen as options trading has jumped.
Indeed, the spot price has repeatedly risen around London's 3pm auction (including into Thursday afternoon's fresh record), suggesting stronger demand to invest than supply at the opening price and thereby needing a higher price to curb demand and boost selling to find the final clearing level.
Yes, some of that demand at the benchmark auctions will have come from bullion banks and brokerages needing gold to match their exposure to client derivatives positions. But crucially, physical demand in India and most especially in
gold's key consumer market of China continues to run strong, and central-bank demand for gold also remains historically hot, again led by emerging market nations in 'the Rest' rather than 'the West'.
That's clearly been supporting and helping drive up the gold price, breaking
the more typical pattern of Asian households and central banks acting as price takers, buying the dips and turning cautious on strong gains. China's latest official purchases (another 12 tonnes in February, the 16th consecutive month of reported accumulation) confirm its position as the world's No.1 central-bank gold buyer. But many other sovereign nations are also favouring the precious metal as a safe haven, as a way to invest against the worsening geopolitical outlook.
Short-term gold price outlook
Looking ahead, the speed of gold's move and the size of the gains made by options traders this week could see speculators join physical investors in taking profit – and those physical bullion owners have only increased the pace of their profit taking as the price has jumped higher.
That will, of course, add more supply to the global bullion market, potentially weighing on prices. What's more, and because gold pays no income, these new all-time price highs could also be vulnerable to dropping back if central banks – led by the US Fed – now commit to holding interest rates higher for longer to try keeping a lid on inflation. That would cool the speculative heat in Comex futures and options which has clearly lit this sudden fire beneath gold prices this week.
But a pull-back isn't guaranteed for the gold price, not given the dreadful mood music from geopolitics, and any dip could prove good opportunity to buy into the precious metal's underlying strength. Indeed, with the boom in US tech stocks increasingly described as a bubble while Moscow and Nato talk openly about the threat of direct conflict, Western portfolios have started to look overweight risk and underweight insurance.
So while private-investor gold demand in Europe and North America will likely remain weak until cash interest rates start to fall, strategic allocations to gold among portfolio managers may start to rebound before the Fed, the ECB and the Bank of England make their first cut.
How unusual is this gold-price surge?
Gold on Thursday set its 4th new London PM benchmark record in a row at $2153.45. Based on that figure, and in US Dollar terms, gold has now risen by:
- Week-on-week 5.2%
- 1-month change 5.5%
- 13-week change 5.8%
- 1 year change 17.9%
Unusual? Short term, yes. Gold's move has been dramatic, reflecting the sudden jump in speculative bullishness. Week-to-week, that rise of 5.2% comes in the top 3% of all weekly moves since 1969 (including price drops).
But on average, weekly gains of this size (between 5.0% and 5.5% in US Dollar terms) have been followed by 1-month gains of 2.4% mean and 1.2% median across the past 55 years; looking at just the past 2 decades, such rises then saw 1-month gains of 0.5% mean and 1.3% median in the Dollar gold price.
Moreover, and compared with the big historic peaks in the gold price, today's move doesn't look anything like the 'blow-off' tops which have marked multi-year highs in the past.
Yes, this week has seen fireworks. But it's come from a strong and solid base, rather than off relentless firework gains across the past month, quarter or year.
Gold's previous runs of record-high prices
Over the past 55 years, and before Thursday this week, gold at the London 3pm benchmark had set a new record...
- 3 days running on 78 of all trading days (ie, some of them are included in longer runs)
- 4 days 33 times
- 5 days 15 times
- 6 days 4 times
- 7 days just once
Drilling into gold-price history, this week's jump – coming as expectations for Fed rates have eased back while sword-rattling between Moscow and Nato has worsened and the dreadful conflicts in both Ukraine and Gaza continue – matches the pattern of previous 5-day runs of new record highs. Because all of which came during periods of financial, monetary or geopolitical stress.
April 1969, for instance, saw bullion prices rise on heavy private-investment demand for gold amid growing rumours and speculation that the USA would abandon its $35/oz peg following the collapse of the US-European central banks' 'London gold pool' the previous March. (It had sold huge quantities of national bullion reserves into the private market to try putting a lid on the price.) The US would finally
abandon the Dollar's gold peg with the 'Nixon Shock' of August 1971.
But of the 15 distinct periods for 5-day record highs in the gold price (spring 1969, New Year and spring 1972, spring + summer 1973, New Year 1974, autumn 1978, autumn 1979, New Year + spring 2008, autumn 2009, autumn 2010, spring + summer 2011, summer 2020) only 3 came close to what proved a longer-term peak. October 1979 was followed by gold setting what became a 2-decade peak at $850 on 21 Jan 1980; August 2011 saw gold peak at $1895 on 6 Sept; late-July 2020 saw gold peak on 6 August at $2067.
What about longer runs of new record gold prices?
May 1973 saw gold set a 6-day run of record highs as oil prices (and inflation) surged amid a threat that Saudi Arabia would impose an embargo on exports to the US because of its support for Israel. (The embargo then came in October.)
July 2020 also saw a 6-day run as social unrest grew against pandemic lockdowns and governments everywhere unleashed yet more record fiscal and monetary stimulus amid the first-wave Covid Catastrophe.
Gold's record 7-day run of new all-time highs
This came in 2008, running from Jan 7th ($859) to 15th ($913) as the global financial crisis accelerated. Global stock markets were falling hard, and the US Fed promised to keep cutting interest rates as panic gripped banking shares and bonds.
The crisis grew until Bear Stearns was rescued by the US authorities (and got taken over by J.P.Morgan) on 14th March. That same day, gold made its first all-time high above $1000. It wouldn't set its final GFC high for another 3 years.
What next for the price of gold?
We don't make price forecasts at BullionVault. As a trading exchange, we earn a (very small) commission whether customers buy or sell, so it wouldn't be right or fair to our users.
But as a group, and in US Dollar terms, private investors using BullionVault's simple, secure and low-cost marketplace at the end of 2023 gave
a 2024 gold price forecast for bullion to finish this year at $2342 per Troy ounce.
That would mark a rise of 12.7% from the final London 3pm benchmark of last year...which might have sounded overly bullish at New Year. Indeed, that year-end prediction from users of BullionVault was higher than the highest high predicted across 2024 by all but one of the 25 professional analysts entering this year's
LBMA Forecast Survey.
Chantelle Schieven, head of research, Capitalight Research, predicted an annual average of $2170 with a peak of $2405 and a low of $1935. But the average annual forecast by all those 25 analysts as a group was just $2059 per Troy ounce, only $20 above what gold has now averaged so far in 2024. And a year-end rise of 12.7% – as forecast by private individual choosing to invest in gold using BullionVault – wouldn't be unusual. Gold in Dollars has risen by more than that in 30 of the past 55 years, including 5 times in the past decade.
Bottom line for gold prices today?
Despite making a run of new all-time highs this week, gold is very far from a crowded trade, never mind a bubble. While the past few days look dramatic, and while the sudden jump in hot-money betting on gold derivatives will naturally burn itself out, the underlying uptrend remains steady, almost boring in fact compared with Bitcoin tripling over the past 12 months or against the big gains in equities led by US tech stocks.
That might explain why Western investors continue to stay shy of gold coins, small bullion bars and
gold ETFs like the GLD and IAU, taking profit as a group overall rather than buying the precious metal right now. But long-term bull markets aren't built by repeatedly grabbing the headlines, and if you view gold as a form of investment insurance – which is how the vast majority of private and professional investors holding gold see it – the best time to buy is before it matters, when other financial markets are doing well and there isn't a rush into the 'safe haven' metal.
And what this week's price pop driven by options betting really shows is how, when Western investors do return to buying gold – whether on cuts to cash interest rates, deeper economic and banking stress, or a worsening of geopolitical tensions and conflict – the precious metal's long-term and ongoing bull market is very likely to keep running higher.
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