Gold’s Gold’s Gold’s

Gold’s focus remains on oil, not yields

Ole Hansen

Head of Commodity Strategy

Summary:  Gold, currently up around 7% so far this year, continues to perform strongly despite persistent headwinds from rising real yields and a stronger dollar. Instead the yellow metal has increasingly been focusing on multiple uncertainties, some of which were already present before Russia invaded Ukraine. Inflation and growth concerns have both been turbocharged by war and sanctions, and together with elevated volatility in stocks and not least bonds, these developments have seen investors increasingly look for safe havens in tangible assets such as investment metals.


Impressive, is the word best describing gold’s performance so far this year. Currently up around 7% during a time where normal drivers such as US real yields and the dollar have risen, normally a development that would see gold struggle. The prospect of aggressive tightening by the US Federal Reserve has driven ten-year real yields higher by more than 1% while supporting a near 4% rise in the dollar against a broad index of currencies.

Last year’s relatively weak performance, especially against the dollar, despite emerging inflationary concerns was driven by portfolio managers cutting back on the holdings they accumulated during 2020 as stock markets rallied and bond yields held relatively steady, thereby reducing the need for diversification. Fast forward to 2022 and we are now dealing with multiple uncertainties, some of which were already present before Russia invaded Ukraine. Inflation and growth concerns have both been turbocharged by war and sanctions, and together with elevated volatility in bonds and not least stocks, investors have sought safe havens in tangible assets such as investment metals.

During the past year, gold and ten-year real yields have struggled to follow their usual inverse paths, and the dislocation accelerated further during Q1 when gold increasingly managed to ignore rising yields. At current levels gold is theoretically overvalued by around 300 dollars, and highlights a major shift in focus.

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.

Source: Saxo Group

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.

Source: Saxo Group

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-gb/legal/disclaimer/saxo-disclaimer)

Saxo Markets
40 Bank Street, 26th floor
E14 5DA
London
United Kingdom

Support Centre
For existing clients, please click here to request support via the Support Centre.

Have a question about our products, platforms or services? Visit the Support Centre to find answers for our most frequently asked questions. If you are still unable to locate an answer to your question, you will also find contact details for your local Saxo office to speak with a representative.

Contact Saxo

Select region

United Kingdom
United Kingdom

Trade Responsibly
All trading carries risk. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more
Additional Key Information Documents are available in our trading platform.

Saxo Markets is a registered Trading Name of Saxo Capital Markets UK Ltd (‘SCML’). SCML is authorised and regulated by the Financial Conduct Authority, Firm Reference Number 551422. Registered address: 26th Floor, 40 Bank Street, Canary Wharf, London E14 5DA. Company number 7413871.

This website, including the information and materials contained in it, are not directed at, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in the United States, Belgium or any other jurisdiction where such distribution, publication, availability or use would be contrary to applicable law or regulation.

It is important that you understand that with investments, your capital is at risk. Past performance is not a guide to future performance. It is your responsibility to ensure that you make an informed decision about whether or not to invest with us. If you are still unsure if investing is right for you, please seek independent advice. Saxo Markets assumes no liability for any loss sustained from trading in accordance with a recommendation.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc. Android is a trademark of Google Inc.