Around the turn of the year, gold had a remarkable run. Futures prices went up for 12 consecutive days, the longest winning streak since the 1970s, pushing them above USD 1,320 per ounce. Yet, according to Julius Baer’s analysts, this streak was “mainly mirroring the weakening dollar”, which declined on nine of the twelve days gold went up. Adding to that, they say that the sentiment in the futures market brightened up as long positions held by speculative traders rose sharply while short positions remained close to multi-year lows. At the same time, there was only muted demand from investors. The house research explains:
Holdings of physically backed gold products, our preferred indicator of investment demand, were broadly unchanged. Gold’s inverse relationship with the dollar was the strongest in over a decade last year and seems to be holding in the early days of this year.
As the dollar started to recover more recently, gold gave away some of its gains. While the greenback is unlikely to return to its peak, we still see upside from current levels as accelerating growth should be accompanied by rising interest rates in the United States. This should weigh on gold over the coming months, justifying an unchanged cautious view.
These short-term rate cycle headwinds should however fade as the year progresses. With the dollar expected to eventually roll over and upside pressure to bond yields easing, medium- to longer-term bottom-fishing opportunities should open up. Sustainable upside to gold should materialise once growth concerns creep into financial markets and revive western world investors’ demand for gold as a safe haven.