Gold surge at lofty levels

At Tricio we use charts in order to look for insight into market sentiment and investor behaviour. Our recent Weekly Talking Points had a chart similar to the one below. This is a monthly chart of gold in USD terms, with 12 and 60-month moving averages and a price oscillator that measures the difference between the monthly close price and the 12-month moving average (red line in the lower window). It basically works as a momentum indicator and the blue vertical lines show that when this indicator gets a bit lofty (flat purple line) then a bit of mean reversion may follow. Prices consolidate or fall, and the indicator works lower. A top picking tool? No, but a useful indicator to say ‘Wow, prices have rallied a bit, huh?’.

The run higher in the price of gold has been really sharp over the last few years. The chart below shows that the sustained break above the $2,070/oz. area (flat red line) just over a year ago really sparked gold bulls. Gold recently made new all-time highs near $3,500/oz. and is correcting a touch. On a long-term view consolidation could take gold back to the 12-month moving average just below $2,700/oz., with the 5-yr. average near $2,040/oz. key below this, suspiciously close to the red line!

One of the popular narratives in the market and financial media is that a weak USD leads to a higher price for gold, and a strong USD leads to a lower price for gold. There are many (many) academic stabs at this, and a lot of analyst and media stories covering it. A leading bullion broker has a note on this from 2024 that suggests that a weak USD makes gold cheaper to buy in a domestic (non-USD) currency, driving up demand, and lifting the price. Nice story, but surely if the buyers are stepping in on low domestic prices, once the price is no longer low they may be deterred from buying at the higher price, right? The following charts below show gold priced in  a variety of currencies.

The chart below is gold in CHF terms. The bullish break higher over the last year looks very similar to the USD chart.

Central bank buying has been a big topic for gold bulls as they suggest that some big countries are building up non-USD reserves just in case they need to avoid US (or Western) sanctions. China is known to be building their gold reserves, but the gold in CNY terms chart (below) suggests that this process has become a lot more expensive.

The chart below is gold in EUR terms. Again, the break higher over the last year is worth noting.

Gold in GBP terms shows a very familiar breakout story.

Traditionally one of the biggest markets for gold has been India. The chart of gold in INR terms shows the big break higher of the last year as well.

Holding gold as a hedge against a depreciating currency can make sense, but then so would buying a house in a hard currency country, buying hard currency stocks or bonds etc. Still, the chart of gold in TRY terms shows that in real terms the big gains in the price of gold (in USD) over the last year and the fall in the TRY vs. the USD have combined to give a really big shift higher.

The story of gold moving with the USD is not a new one. The chart below shows gold (semi-log) and the EUR/USD (proxy values) from the 1980’s. Gold is the red line, the EUR/USD is the purple line. The big rally in the USD (lower EUR) saw a big low set in 1985 with the price of gold falling as well. On this chart, gold has done well since 2015 and has pretty much side-stepped USD swings. 

Bottom line? When people say ‘gold trades higher on a weaker USD’ it may be best to nod politely and go with the flow. At times the story for a weaker USD may tie in with the story for a rally in the price of gold. At other times, maybe not so much. Right now? Gold has had a strong 25 years or so and a really strong year. This could continue, but on our study, gold tends to ‘mean revert’ if prices stray too high away from the 12-month average.