Gold prices closed at a record high Thursday, capping the best two-quarter stretch for the precious metal in eight years. While analysts point to fading fundamental support, there remain reasons why gold can keep rallying.
Front-month contracts for gold rose 2% on Thursday to finish at $2,234 per troy ounce, an all-time high for the yellow metal, which already has gained more than 8% this year.
“The rally is now facing diminished fundamental support,”
strategists Wayne Gordon and Giovanni Staunovo wrote in a note Thursday note. “Despite this, questions remain about the metal’s near-term trajectory as the headwinds … have not managed to unsettle the rally.”
Indeed, while some fundamental support for gold might be weakening, prices still have marched higher, crossing important technical levels and making the metal appear to have momentum. “Spot gold’s daily closing chart shows that an acceleration is underway already. Gold broke out of a four-year consolidation and just hurdled a Bull Flag,” Andrew Addison, founder of Institutional View, wrote in a note.
The strategists at UBS cite positive demand from China as one factor buoying gold, alongside central bank buying of the precious metal, though institutional purchases likely slowed down in the current quarter. The big unknown factor for gold remains the outlook for Federal Reserve monetary policy, with “upside risk [for prices] if incoming data confirm a soft landing for the U.S. economy,” wrote Gordon and Staunovo.
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A soft landing refers to the Fed’s ability to tame inflation without causing a recession. Fed policy is key for gold, and not just because the outlook for the economy can dictate demand for haven assets. Central bank policy moves interest rates and thus Treasuries, which compete with gold for investor attention and look more attractive when rates, and therefore bond yields, are higher since gold has no yield.
The Fed’s last policy meeting in March—which the market read as suggesting that rate cuts are coming as soon as June and gave a boost to stocks—was the latest catalyst that extended gold’s rally, the team at UBS noted.
“Our base case for the Fed beginning to cut rates by midyear means prices could go higher,” wrote the strategists. On the flipside, signs that inflation remains persistent and that the Fed could keep rates higher for longer represents a critical risk to gold’s rally.
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A development on that front came Friday with the release of the core personal-consumption expenditures price index, the Fed’s preferred measure of inflation. Core PCE figures for February showed inflation up 2.8% year over year, matching price growth in January and suggesting somewhat sticky inflation.
Another signal that gold could continue to attract buyers lies in its comparison with the
stock index, according to an analysis by economist Charles Gave, founder of Gavekal Research.
“The S&P 500 is on the verge of becoming overvalued versus the stock of capital, while gold is almost undervalued against my measure of retained earnings,” Gave wrote in a note Thursday. “Gold is ‘undervalued’ against the S&P 500 by a hefty -52% and -13% versus its own long-term trend. In contrast, the S&P 500 stands 33% above its own long-term trend level.”
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Gave recommends that investors hedge an equity exposure with a significant position of gold—at least 20% of a portfolio. “At this point my preference based on the relative position of the two reserve assets is to favor gold, followed by equities,” he wrote.
Write to Jack Denton at jack.denton@barrons.com
