Gold: How Much More Upside?
Gold has performed well in recent weeks. In particular, having traded sideways for four months (from April to July), the price is up 8.5% since its late-July lows, and last week made a record high (at $2,546), FIG 3. The price has been supported by (i) growing concerns about weakness in the US labour market; and, linked to that, (ii) a fall in Fed rate expectations, the real (TIPS) yields, and the US dollar (i.e. the three key ‘fundamental’ drivers of gold price direction*). Regarding rate expectations, for example, the market was priced for 67bps of Fed cuts by the end of the year (in July). As of yesterday’s close, it’s priced for 100bps of cuts (with another 129bps of cuts in 2025).
The key fundamental question for gold investors, therefore, is: How much more easing needs to be priced into the US rates curve? That, naturally, depends on expectations for US growth (and recession risks). Our view on that is laid out in various recent ‘Global Macro Reports’.
Added to that, net LONG positioning in gold has become increasingly crowded in recent weeks and is now at its highest level since early 2022 (FIG 2), while gold prices are technically overbought, and sentiment is bullish (i.e. generating a contrarian SELL signal).
From a technical perspective, therefore, the run in the gold price is almost 2 years old and looking increasingly overextended. How the macro evolves from its current set-up is likely key to how much further the gold price has to run.
*Albeit, since 2022, Chinese/global central bank buying has also become a key gold price driver.
FIG 1: US 10 year TIPS yield (%), scale INVERTED vs. gold price (US$/oz)
FIG 2: Gold net speculative positioning vs. gold price (USD/oz)
FIG 3: Gold futures, shown with 50 & 200 day moving averages (USD/oz)
