(Kitco News) – Gold prices are no longer being driven by investors’ reactions to macroeconomic fundamentals, but by physical flows and central bank demand, according to an analysis from IG.
In a report published on Monday, IG analysts wrote that gold has always represented different things to different people. “Some see it as an inflation hedge, others as a safe haven,” they said. “For many, it’s an alternative to the Dollar or interest-paying government bonds. At eyeQ, our smart models take all those views into account — inflation expectations, risk appetite (like the VIX), the US Dollar and real yields.”
“Right now, those factors point to a fair value of $2,906 — the level gold should be at given current macro conditions,” they said.
“Our model’s fair value (the orange line) has been trending higher for months, showing solid macro support for higher gold prices,” IG noted. “But after the recent dip, gold now trades 1.9% below fair value — a slight discount, but nothing extraordinary. For gold bugs, though, there may be better value elsewhere. Gold mining stocks, like Newmont, screen as far cheaper — currently 13% below fair value based on macro conditions.”
The analysts also shared a simple way to determine if the gold market is currently being driven by macro factors or by physical flows.
“[C]heck the macro relevance score in the [above] chart,” they said. “A high number here means macro drivers dominate, and our signals are stronger. A low number suggests flows (like central bank buying) are more influential.”
IG said the tipping point, according to this model, is the 65% level. “Above that, macro rules,” they said. “Below it, you’ll want to dig into those other drivers like ETF flows or central bank stockpiling. Right now, that’s where the story is.”
Gold prices are showing strength on Monday following last week’s downbeat performance. Spot gold last traded at $2,891.32 per ounce for a gain of 1.16% on the daily chart.
