It seems almost every asset class has been hitting records: U.S. stocks, Japanese stocks, German stocks, bitcoin, gold.
That last one is unusual. Rising prices usually generate speculative interest in an asset, but not here: Jim Bianco of Bianco Research posts this chart showing that gold ETF holdings have actually gone down as the price has spiked higher. That’s not the only anomaly.
The dollar is rising, usually a bad sign for the yellow metal. Federal Reserve interest rate cut expectations have been subsiding. There’s usually a strong negative relationship between inflation-adjusted interest rates and gold, but gold has done well even as the 20-year TIPS rate is near the highest levels in 14 years.
“Gold’s performance over the past several weeks has been raising many questions, the most crucial of which currently is whether there is something that we are not fully accounting for,” said Joni Teves, a strategist at UBS, in a note to clients on Monday.
The answer may be in China. There’s a big arbitrage, of about $50 an ounce, between the price of gold in London and in Shanghai. (The price in Shanghai was as much as $90 higher last year.) The financial blogger who goes by the name Doomberg pointed out in a recent interview that the net effect of that arbitrage opportunity is to encourage gold to be relocated to China.
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But there’s also the issue of physical demand for gold. With the Indian economy one of the fastest growing in the world, demand for gold has been strong, and expectations of a normal monsoon season could help crop prices and help stoke demand for gold consumption in India’s rural areas, said UBS’s Teves. There’s also been better-than-expected demand in China following the lunar new year holidays, she added.
Teves says it may be a combination of factors behind gold’s mysterious rise. “Perhaps the answer to this question is that several factors are collectively keeping gold well supported. Perhaps some segments, such as official sector buying and physical demand are stronger than we think, more than offsetting the measured selling from ETFs,” she said.
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