Published on October 8, 2024

Investing in Gold: Will the Rally Continue?

Gold prices have recently rallied to new all-time highs. The overwhelming purchases driven by central banks, Chinese households, and ETF in-flows have bulldozed traditional technical indicators, such as inflation, interest rates and dollar strength.1 However, these bullish drivers have shown cracks as of late, suggesting that the rally is running out of steam. Those considering investing in gold should proceed with caution.

Investing in gold is largely regarded as a store of value and an inflation hedge. The precious metal traditionally rallies with high inflation, has an inverse relationship with interest rates, and has an inverse relationship with the dollar.2, 3 However, the recent rally has persisted amidst both periods of rising and falling inflation, rising and falling interest rates, and a strengthening and weakening dollar. “It is absolutely counterintuitive of everything I’ve ever seen in a rally,” says Peter Thomas, chairman of precious-metals dealer Ausecure.4

These breakdowns in technical indicators suggest other factors have been driving prices higher.

Gold prices have risen largely due to central banks, primarily in Russia and China, buying bullion to diversify away from dollar-based assets and skirt economic sanctions during a time of higher global tensions.5, 1 While Russia’s bullion purchases are a bit more discreet, the People’s Bank of China was the world’s single largest buyer of gold in 2023.6

Defense Technology: Chart of Central Banks carry gold buying momentum into 2024

Source: World Gold Council. April 2024. “Gold Demand Trends Q1 2024”

However, the PBOC has stalled purchases with August marking a 4th straight month without adding any gold to its reserves after 18 straight months of purchases.8 With 2023’s largest buyer in gold stepping off to the sidelines, there is considerable bidding to be replaced in order to see the next leg higher. Recent price action suggests that other buyers have stepped in to replace the PBOC, but bulls should question whether the pauses from the PBOC could be a leading indicator of other sources of buying drying up into the new highs, as has been the case more broadly in China.

Aside from the PBOC, Chinese households have been investing in gold as a store of value amidst an unprecedented real estate crisis and a weak stock market in the Chinese economy.9 Early figures from 2024 Chinese customs data showed a 34% year over year increase in metals purchases.10 According to BMO’s analyst Colin Hamilton, “gold exposure has become a necessity for Chinese portfolios as they continue to expect disinflation and income uncertainty.”11 However, gold imports into China have been more muted recently, suggesting the market is well supplied and calling into question the marginal demand among Chinese households.12 Further, Chinese dealers have been offering discounted gold premiums as of late, signaling slowing demand.13 Chinese households have been a driver of gold’s rally amidst economic woes in their economy, but limited imports and shrinking dealer premiums raise doubts about those purchase flows continuing.

Gold ETF flows have picked up as bullion has reached new all-time high prices, with August marking the 4th month in a row of in-flows led by western countries.14 These in-flows result in gold being purchased on the open market and stored by the ETF issuers.

Defense Technology: Chart of Gold ETF Flows

Source: CME Group. September 2024. “Gold Is Defying Traditional Relationships as Demand Grows”

While bulls have been excited to see the in-flows and purchases, they should not be expected to continue as fund flows have been inconsistent with most of 2023 and the first four months of 2024 being marked by out-flows. Further, ETF in-flows have been a disputed indicator of gold performance in the past as some traders view them as a positive indicator, while others view them as a contrarian signal of retail buyers investing in gold at the top. “High prices always attract people; people always buy it on the run up more than they do on the run down,” says Terry Hanlon, president of metals trading firm Dillion Gage.15 In fact, most of the recent rally has come alongside gold ETF out-flows.16 While gold ETF in-flows have been a welcome sign for bulls over the last four months, they should not be counted on by those investing in gold as out-flows have been far more prominent over the last two years.

Traders have traditionally viewed gold prices in relation to strength in the dollar, inflation, and interest rates. Those correlations have broken down as of late, with large global buyers taking over and driving prices to all-time highs. Central banks, Chinese households, and western ETF flows have driven the recent rally, and retail investors have piled on. However, the single largest buyer of gold in 2023 in the PBOC has recently put its purchases on hold, which could be a leading indicator of other sources of buying drying up. Further, with local dealer premiums at relative lows, demand among Chinese households has begun to falter. Lastly, ETF in-flows have been steady for the last four months but should not be counted on to continue. With three of the largest drivers behind the rally showing cracks, there is a lot of buying left to be replaced in order to see the next leg up in prices. Those considering investing in gold should proceed with caution as the bullish forces behind the rally look to be running out of steam and the party could be coming to an end.

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