It’s been very hard to reconcile the recent upside move in gold based on the fundamentals.
I don’t think that rate cut expectations make sense for the move, as gold waited for markets to start pricing out Fed cuts before the move higher started.
Some are pointing to central bank buying, while others point to inflation hedging (don’t get me started on this one).
But I think majority of the move has simply been a momentum play.
At some stage momentum takes over, which makes chasing it at the highs unattractive, and fading at the highs too dangerous.
The options market is getting a bit more cautious of the recent rally though.
This chart shows gold spot in blue and 1-month 25 delta risk reversals for gold in red.
Notice the divergence between spot and risk reversals, with risk reversals showing increased demand for puts.
This isn’t enough to get short gold on its own, because a big miss in US CPI could see risk reversals catch up higher to spot.
What it does show is that if we should get a big upside surprise in CPI, it could be enough to cause a dent in the recent relentless bid in gold.
