After a torrid start to the year, gold has more than made up for it with a record-breaking March month. The precious metal is nearing 8% gains this month, as it roars back to $2,200 after having briefly dipped below $2,000 during February trading.
I remember the latter quite vividly as gold initially dipped after the US CPI data at the time. And then rebounding slightly after on softer US retail sales data in the same week. The bounce also coincided with a key technical point, with buyers putting up a defense at the 100-day moving average.
Following which, it has been one-way traffic for gold in the last three weeks. And that's quite something despite a not-too-heavy shift in market sentiment on the outlook for major central banks.
If you've read my previous takes on gold since last year, I've been quite persistent in making a case for staying long in gold based on a structural view. And while that take looks to be vindicated now, I will be the first to admit that this is coming quite a lot sooner - and faster - than I would expect it to.
Don't get me wrong. The reasons for anticipating gold to push higher are all still there. But funnily enough, this is coming at a time when rates haven't really trended lower at all this year. In fact, 10-year Treasury yields at 4.27% today are some 40 bps higher than where it was at the end of December.
So, there's that divergent correlation that has broken down for starters. Next, we also have been seeing a more resilient dollar in general in Q1 so far. That is also in part to traders scaling back on the overly dovish expectations seen in November and December last year.
Yet, here we are.
The worry I have about gold right now is that perhaps we've gone too far, too fast. That's the only concern I have with the latest surge higher when all you take all the other factors into consideration.
And the latest convergence between the market pricing on interest rates and the view that major central banks are adopting might play out as a double-edged sword moving forward.
Traders are settled on conforming to a June rate cut for the Fed and ECB. Meanwhile, the BOE is also "comfortable" with a profile of a rate cut in August. Thus, gold can find comfort from that as long as inflation developments stay the course. But should we see more stubborn price pressures instead, the opposite reaction can be expected.
However, as seen from the last few weeks, it is evidently clear where the balance of risks is skewed towards. The gold bugs have finally caught fever and broader markets are taking notice.
All else being equal, gold looks set to settle in a new and higher range in the bigger picture. But the structural playbook remains the same as it was before, and that is to buy the dip.
