WHAT GOLD’S RECORD RUN IS TELLING INVESTORS
Historically, shining gold prices have almost always been accompanied by grim news. Will this time be different?
“Governments lie; bankers lie; even auditors sometimes lie. Gold tells the truth.”
–William Rees Mogg t the end of the Mahabharata war, Yudhishthira, the leader of the Pandavas, is overwhelmed with guilt and grief over the massacre of his relatives. Looking to boost his flagging spirits, Lord Krishna and sage Vyasa advise him to perform the Ashvamedha Yagna—an extravagant and elaborate ceremony meant to demonstrate the suzerainty of Vedic kings.
However, Yudhishthira confides to Krishna that the state treasury is empty because of the war. Krishna then offers a suggestion which would gladden the heart of any multi-asset fund manager—‘fill your coffers with gold (left behind by a king in the Himalayas) and achieve your goals’.
If there is one asset class which carries the weight of antiquity on its shoulders, whose desire is embedded in the very soul of human civilization, and which even today serves as a bulwark against the vicissitudes of fate, it is gold.
While stocks, bonds and other assets flutter in and out of fashion, the almighty gold’s track record as the flagbearer of wealth stretches for over 5,000 years. The ultimate barometer of human progress and prosperity.
Which is why the most prominent investors and institutions around the world sit up and pay attention when the bullion market makes unusual moves.
ASHINING BRIGHT
After a relatively subdued start to the year, gold prices started gathering steam in early March. By April, the precious metal had breached the $2,300 per ounce mark for the first time ever, capping a series of record-shattering moves. As of 9 April, gold had made fresh lifetime highs for eight straight sessions.
Suddenly, a global asset worth $12 trillion was behaving like a jumpy small-cap stock.
The financial cognoscenti scrambled to provide answers.
Some commentators attributed the rally to expectations of interest rate cuts by the US Federal Reserve, which would make the non-yielding yellow metal relatively more attractive.
Others pointed to rising geopolitical tensions, which have always spurred demand for the safe haven asset. But none of these offer a credible explanation for the timing or intensity of the upmove.
The global geopolitical temperature has been feverish for a long time now. As for the Fed’s monetary policy, rate cut projections have actually been scaled back over the past few months due to still-too-hot inflation.
Retail participation in the rally too has been absent. Global gold exchange-traded funds (ETFs) saw outflows for nine consecutive months till February, as per the World Gold Council. In 2024 alone, the outflows have been to the tune of $5.7 billion, with the US and Europe leading the pack.
“I think it’s some sort of a new playbook which we are seeing in gold. Real interest rates are very high and yet gold is soaring. We also don’t see too much investor demand for the metal, especially from the western world,” Ronald-Peter Stöferle, managing partner and fund manager at asset management firm Incrementum AG, told Mint on phone from Liechtenstein. Then what’s driving the rally? “Chinese demand has been very strong, not only from the central bank...the People’s Bank of China is buying like crazy...but also from private investors because the Chinese real estate sector is struggling. So many Chinese investors are flocking to gold,” he said.
Rest of Asian demand too is holding up well. In fact, China and India are responsible for 50% of gold demand, while overall, the emerging markets account for two-thirds.
“All in all, it’s a very broad bull market...not only in US dollars, gold is at alltime highs in almost every currency,” he said, adding the rally still has legs, though a bit of profit-taking cannot be ruled out.
TANGLED TIES
What is confounding many market watchers is how other precious metals like silver as well as global equities and even cryptocurrencies are marching to record highs in this ‘everything rally’.
Gold traditionally has an inverse relationship with stocks.
Investors swarm to the precious metal during times of turbulence as a sure-shot way to protect their wealth, while equities are the preferred bet when optimism runs high over the trajectory of economic growth and corporate profits.
For instance, gold shed more than 20% of its value in dollar terms during the 1980s and the 1990s, which were two raging bull market periods for equities.
However, while the S&P500 declined 9% over the first decade of 2000s following the dotcom bubble burst and the 2008-09 financial crisis, gold vaulted by 275%.
So, what explains the current synchronous liftoff?
“One reason for these asset classes moving in tandem could be the emergence of high frequency trading, in line with the increasing integration of financial markets strengthening correlations between them,” said Naveen Mathur, director— 1,732.76 2,398.34 commodities & currencies, AnandRathi Shares and Stock Brokers.
He added that the unprecedented monetary stimulus following the covid-19 crisis has expanded the demand base for assets, driving investors and fund managers towards gold and equities at the same time.
Global experts too say gold and equities moving in conjunction is a central banktriggered phenomenon.
“We can put this down to a lot of liquidity looking for a home. Equities benefiting from US economic resilience and anticipation of improvements in Europe, which ties in of course with anticipation of falling interest rates. Those arguments apply both to equities and to gold,” Rhona O’Connell, head of market analysis (EMEA & Asia) at American financial services firm StoneX, told Mint.
Which means the gush of liquidity sloshing around in the global financial system is distorting some time-honoured financial correlations, with even a strong dollar not deterring the gold rally.
But no discussion on market distortions is complete without addressing the proverbial 800-pound gorilla in the room.
CHINESE CHECKERS
It is remarkable how much impact a single country has on multiple global markets. If you are an analyst tracking anything from copper, crude oil, coal, iron ore and soybeans to lithium, steel or specialty chemicals, you have to keep an eye on China.
The same holds true for bullion. The People’s Bank of China (PBC) has been buying gold with a religious fervour. In 2023, PBC bought 225 metric tonnes of