Uncertainty in bond markets is likely to fuel interest in gold in January following a strong December which saw the metal give back less than expected given a strong dollar and profit-taking, according to the World Gold Council (WGC).
In its monthly reports for December, the council said gold ETF inflows returned to positive in December, led by Asia and Europe, rounding 2024 with their first global annual inflow (US$3.4 billion) in four years.
These and gold’s rocketing gold price in 2024, when it set 40 all-time highs, pushed total gold ETF assets under management (AUM) to a record high US$271 billion.
While the positive outlook and higher risk constrained outflows in December, the WGC warned that technical signals posed a near-term headwind for gold as they indicated that it may be in overbought territory.
December review
During December the WGC said gold gave up a little of its year-to-date gains, finishing down 1% on the month, but it still ended the year 26% higher overall.
The WGC Gold Return Attribution Model (GRAM) outlined that the primary driver for this decline was a strong rally in the US dollar index (opportunity cost FX) which finished the year at its high.
Softening gold’s drop were a rise in breakeven inflation expectations and the Geopolitical Risk index (risk & uncertainty), likely on the back of martial law declared in South Korea, as well as small global gold ETF inflows (momentum).
Global gold ETFs eked a US$778 million (4t) gain in flows thanks to strong Asian ETF buying, significantly offsetting outflows in North America during December.
Those outflows were quite benign, according to the WGC, given the weakness in November and the prospect of profit-taking following such a strong year.
It said that a positive sell-side outlook for gold probably helped constrain a bigger end-of-year shift out of gold while profit-taking also likely occurred in futures, where somewhat extended managed money net longs shed US$4 billion (-49t) over the month taking total net positions down to US$65 billion (764t).
January jitters
Points likely to influence gold’s performance in January were:
- Hawkish Fed spurs profit-taking but also signals interest rate uncertainty.
- Bonds are set to stay on shaky ground, and this should help gold at the margin.
- Short term, gold may need to consolidate in Q1 2025 as technicals signal that it resides in overbought territory.
A 25bps Fed policy rate cut in December, doused with further hawkish guidance, resulted in sizeable intraday wobbles in equities, US Treasuries and gold.
The S&P 500 fell by 3% and the 10-year Treasury yield marked the largest FOMC-meeting move since 2013. Gold dropped by more than 2%.
Undoubtedly, the Fed’s sober messaging prompted some investors to take profit following a stellar year for equities and gold, with tax-loss selling an additional incentive to cut equity exposure.
High rate of uncertainty
The reaction probably also reflected some pent-up uncertainty that markets, as well as the Fed, soon face a change in personnel at the helm of the US economy come January 20.
While the FOMC members are somewhat confident in where interest rates will be at the end of 2025 – they are unusually divided on where rates will be at the end of this cutting cycle.
Interest rate uncertainty is also reflected in the elevated level of the MOVE index – an options-based measure of expected (implied) bond volatility.
This is partly the result of two months of positive inflation surprises in the US. But elevated debt and deficits are arguably also factors.
Interest rate uncertainty should favour gold relative to bonds as it raises their associated premia, at least through January with debt ceiling wrangling and the US presidential inauguration on the cards.
Gold looks the other way
In the past two years, a breakdown in the relationship between gold and real interest rates has been on display.
In the past, the WGC has attributed the phenomenon largely to emerging market central bank buying and geopolitical risk premia. But perhaps bond uncertainty has also played a role.
It also looks like this is a statistically significant difference, if gold returns on a real yield component are regressed with an interaction dummy for when the MOVE index is above 100 (it has recently risen to 99).
The normal sensitivity is more than halved when bond uncertainty is high, even accounting for moves in the US dollar index.
Thus, alongside central bank demand and geopolitical risk, it may further explain why the traditional simple real rate model hasn’t been quite as accurate over the past two or so years as it was post the global financial crisis up to 2022.
Until debt concerns, a drive by central banks to continue their diversification of reserves, and geopolitical risks wane, gold is unlikely to take much of a negative cue from bond yields.
To add fuel to the fire, bond market uncertainty might get amped up in January again as the Biden administration carves out its last 10 days in office. And debt ceiling jitters are set to resurface in the middle of the month when the Treasury could be forced into extraordinary measures to avoid a debt default, as warned by the incumbent Treasury Secretary, Janet Yellen.
Technical handbrake
While uncertainty provides some wind beneath gold’s wings, the WGC also takes note of the pressure that a stellar year like 2024 might exert on the price going forward. Technically, gold will have to battle what looks like overbought territory for some time.
Gold appears technically overbought on monthly signals, and may need to consolidate. Gold price (US$/oz) and its Relative Strength Index.
The long-term structural uptrend may get challenged in early 2025 as monthly momentum indicators suggest a 'sell' signal after five months in extreme overbought territory, with similar signals seen at the peaks in 2006, 2008, 2011 and 2020.
Longer term, the core uptrend looks well cemented and any near-term weakness could be viewed as an opportunity for investors to re-engage in gold at more attractive levels.