What are the driving factors behind gold ’s recent rally?
After the start of the new year, gold rose sharply due to the tension between the United States and Iran, and once surged above $ 1610. Adam Perlaky, manager of investment research at the World Gold Council, summarized several reasons that might stimulate the recent surge in gold prices.
1. Technical breakthrough gold prices were at a critical level in early December, near the top of the 50-day moving average and a bullish pennant pattern (Figure 1). Since then, the price of gold has risen above $ 1,500 and the moving average has been confirmed, indicating that the price of gold will rise to the top of the pennant shape around $ 1575.
2. Bullish positions in the derivatives market Last December, investors actively bought gold call options. It is particularly noteworthy that these purchases clearly depart from OTM out-of-the-money options. Options volatility reached its highest level in the fourth quarter of 2019 (Figure 2) also reflects this bullish position. Such positions usually mean that market participants are more likely to expect price increases.
3． Low trading volume In November last year, gold trading volume rose sharply, reaching 170 billion U.S. dollars per day, much higher than the average of 145 billion U.S. dollars in 2019. However, this situation reversed significantly in December last year, with daily trading volume down 26% to $ 126 billion. The lower volume may reflect a decrease in sellers willing to sell before the end of the year, providing support for a larger increase.
4. Investors rebalance their investment portfolios by 2020. In November last year, investors' demand for gold fell somewhat. This can be seen from the outflow of gold ETF funds and the decrease in the number of COMEX gold futures net long positions. However, this trend reversed in December. Net long positions in gold approached historical highs, and gold ETF holdings also reached historical highs (see Figure 3).
Evidence shows that investors may be inclined to continue to hold risky assets such as stocks, but not to hedge their investment portfolios in preparation for possible pullbacks, especially as geopolitical risks have been high since 2019.
5. Fed repo activity The Fed began to reduce the size of its balance sheet from 2018, but changed this decision in the second half of 2019 (see Figure 4), especially in the fourth quarter, which began to regularly inject nearly $ 500 billion in repurchases into the market (Repo) funds. This activity continued until 2020, and some market participants described it simply as another form of quantitative easing (QE). Historically, the expansion of QE will stimulate the rise in gold prices.
6. Increased geopolitical risks Driven by the confrontation between the United States and Iran, tensions in the Middle East have supported the inflow of safe-haven funds, pushing gold prices to a six-year high. Although Trump has since eased his attitude and pushed the price of gold down to $ 1,550, the price of gold has risen by more than 2% in just two weeks so far this year.