The positive outlook for gold yet a short volatility

 

Structural uptrends may offer attractive entry points in 2025 

Over the past two years, a breakdown in the relationship between gold and real interest rates has been on display. “We have in the past attributed the phenomenon largely to emerging market central bank buying and geopolitical risk premia. But perhaps bond uncertainty has also played a role, said World Gold Council (WGC) in their Gold Market Commentary for the month of December 2024. 

Data suggests that when interest rate uncertainty – as measures by the MOVE index - is high, yield trajectory appears to exert less of a drag on gold returns than when it is low. It also looks like this is a statistically significant difference, if we regress gold returns on a real yield component with an interaction dummy for when the MOVE index is above 100 (it has recently risen to 99). 

The normal sensitivity is more than halved when bond uncertainty is high, even accounting for moves in the US dollar index. Thus, alongside central bank demand and geopolitical risk, it may further explain why the traditional simple real rate model hasn’t been quite as accurate over the past two or so years as it was post the global financial crisis up to 2022.  

Until debt concerns, a drive by central banks to continue their diversification of reserves, and geopolitical risks wane, gold is unlikely to take much of a negative cue from bond yields. To add fuel to the fire, bond market uncertainty might get amped up in January again as the Biden administration carves out its last twenty days in office.  

And debt ceiling jitters are set to resurface in the middle of the month when the Treasury could be forced into extraordinary measures to avoid a debt default, as warned by the incumbent Treasury Secretary, Janet Yellen. 

Technical handbrake: While uncertainty provides some wind beneath gold’s wings, we take note also of the pressure that a stellar year like 2024 might exert on the price going forward. Technically, gold will have to battle what looks like overbought territory for some time.

The long-term structural uptrend may get challenged in early 2025 as monthly momentum indicators suggest a sell- signal after five months in extreme overbought territory, with similar signals seen at the peaks in 2006, 2008, 2011 and 2020.

 Longer term, the core uptrend looks well cemented and any near-term weakness could be viewed as an opportunity for investors to re-engage in gold at more attractive levels.6

In summary, bond uncertainty may mean that gold is less likely to dance negatively to the tune of bond yields for the foreseeable future. 

That is good news. But gold’s stellar performance in 2024 may leave it facing a near-term uphill struggle as technical indicators suggest it is overbought. That said, given that the longer-term trend is intact, it could present investors with the opportunity to engage at more attractive levels.