Gold’s focus remains on oil, not yields

The net reduction in bullion-backed ETFs that was seen throughout last year came to halt in late December, and since then total holdings have risen by 282 tons to 3325 tons. During the same time leveraged funds, primarily operating in the futures market, given the ability to trade lots valued at $195,000 for a margin of less than $8,000, have been much more dependent on the directional movements in the market. Following the March 8 failed attempt to reach a fresh record high they spent the following weeks scaling back exposure. An exercise that was not completed until the week of April 12 when they returned as net buyers, thereby aligning them with the mentioned ongoing demand for ETFs.

While inflation was something we talked about last year, the actual impact of sharply higher prices of everything is now increasingly being felt across the world. In response to this investors are increasingly waking up to the fact that the good years which delivered strong equity returns and stable yields are over. Instead the need to become more defensive has set in and these changes together with the risk of what Russia, a pariah nation to much of the world now, may do next if the war fails to yield the desired result.

Instead of real yields, we have increasingly seen gold take some its directional input from crude oil, a development that makes perfect sense. The ebb and flow of the oil price impacts inflation through refined products such as diesel and gasoline while its strength or weakness also tell us something about the level of geopolitical risks in the system.

In our recently published Quarterly Outlook we highlight the reasons why we see gold move higher and reach a fresh record high later this year.