Gold prices continue to hit new highs, UBS: The reverse model can't explain it anyway

After experiencing a surge in March, the price of gold continued to rise in April. Spot gold rose to $2354 on Monday, up about 1% intraday, and both spot and futures gold prices hit record highs for the seventh consecutive trading day.

On April 8th, UBS strategist Joni Teves released a report stating that gold reached new heights in the new week. There are some positive news in the market (such as Zimbabwe issuing gold-backed currency), but these factors alone are not enough to explain the significant increase in gold prices. Gold has broken through resistance levels and decoupled from macro fundamentals, even breaking the gold pricing model (which considers key factors such as the US dollar exchange rate, real interest rates, MOVE, and VIX volatility indices).

UBS pointed out that as shown in the model results, the recent trend of gold completely "deviates" from the trend of real interest rates. Since the beginning of this year, when real interest rates have fallen, the beta coefficient between gold prices and 10-year US Treasury Inflation-Protected Securities (TIPS, real interest rates) has been negative; but when real interest rates rise, this coefficient turns positive, contradicting the traditional understanding (that rising real interest rates lead to a decline in gold prices).

UBS stated that residual analysis shows that the model cannot explain most of the recent rise in gold prices. In addition to traditional influencing factors such as the US dollar exchange rate, real interest rates, and uncertainty indicators, there may be other important drivers pushing up gold prices recently.

UBS pointed out that long positions in the gold market have significantly increased, with total speculative net long positions and fund managers' net long positions approaching the highest levels in the past 12 months. In the short term, the rapid rise in gold prices may bring some profit-taking pullback risks:

CME data shows that open interest in futures contracts increased by about 1 million ounces from Tuesday to Friday last week, with actual positions possibly higher. Given the magnitude of the gold price increase and the accumulation of positions in the short term, we believe market participants may take profits at these higher price levels. Nevertheless, these two indicators are still about 50-60% lower than historical highs.

Executives and analysts from major Wall Street investment banks have given various answers as to why gold has surged at this time, including: central banks around the world are repositioning gold as a reserve asset; hedge funds are betting on a shift by the Federal Reserve, with US bond yields set to decline; quantitative traders are attracted by the rise in gold prices; market concerns about stubborn US inflation and a hard landing; global geopolitical risks and unpredictable macroeconomic outlook

Central Banks Actively Buying Gold as Prices Rise

According to UBS, central banks have been actively purchasing gold as prices rise, with current statistics showing net purchases of around 65 tons in January and February:

Among them, data released by the State Administration of Foreign Exchange of China shows that in March, China purchased about 5 tons of gold, bringing the total purchase for the first quarter to 27 tons. China has been increasing its gold reserves for 17 consecutive months and is currently the largest buyer among central banks, followed by Turkey and India.

According to a report recently released by senior analyst Krishan Gopaul of the World Gold Council, in February of this year, global central banks net purchased 19 tons of gold, marking the ninth consecutive month of growth. Although the total purchase volume decreased compared to January, the net purchases in the first two months totaled around 65 tons, which is four times higher than in 2022:

In February of this year, in addition to the continuous increase in holdings by the Chinese central bank, the National Bank of Kazakhstan net purchased 6 tons of gold, increasing its holdings by 12 tons so far this year; the Reserve Bank of India also net purchased 6 tons, with gold holdings increasing by over 13 tons this year; the Czech National Bank increased holdings by around 2 tons, marking the 12th consecutive month with purchases of over 1 ton of gold; and the Central Bank of Turkey increased holdings by 4 tons, while the Monetary Authority of Singapore net purchased 2 tons, and so on.

Analysts generally believe that the behavior of global central banks in buying gold has a certain impact on gold prices, but it should not be considered the main or sole reason. Data shows that while central banks continued to buy gold in 2022, the overall gold price was still falling, indicating that the purchases by global central banks did not support the gold price.

Why Buy Gold Now?

So why is the price of gold hitting new highs?

Media analysis suggests that one possible reason for the rise in gold prices is that some gold investors are starting to pay attention to the risk of a hard landing in the U.S. economy, and considering geopolitical factors, they are eager to buy physical gold as a safe haven tool.

David Einhorn, founder and president of Greenlight Capital and billionaire investor, believes that due to the Federal Reserve's difficulty in controlling inflation, it may maintain its tightening monetary policy for a longer period than expected, potentially leading to underlying economic risks. Based on this, he is increasing his investments in gold Aynhoen stated: "We hold far more gold than GLD. Physical gold is also an important investment for us." He further explained: "Our country's monetary and fiscal policies tend to be loose overall, which inevitably leads to deficit issues. Investing in gold is a way for us to hedge against potential unfavorable situations in the future."

Media analysis points out that the above explanation can also illustrate the relationship between changes in the gold price spread and the Federal Reserve interest rates - why, in situations of higher interest rates, the gold lease rate (the spread between London spot gold and forward contracts) may show anomalies, with investors preferring to hold physical gold rather than invest in forward contracts:

In recent weeks, as the spot gold price has soared, the spread between London spot gold and forward contracts (also known as the "gold lease rate") has unusually fallen below the Federal Reserve interest rate.

Normally, the gold lease rate should be slightly higher than the Federal Reserve interest rate. This is because the gold lease rate reflects the opportunity cost of gold, i.e., the potential income that investors forego by holding gold instead of cash (which can generate interest income). When the Federal Reserve interest rate rises, the attractiveness of holding cash increases, and the gold lease rate usually rises as well.

However, recently, despite the Federal Reserve interest rate being at a relatively high level, the gold lease rate has unusually fallen below the Federal Reserve interest rate. The reason for this anomaly may be that investors are concerned about future uncertainty and potential market turmoil, leading them to prefer holding physical gold rather than investing in forward contracts