(Kitco News) – While central banks were the major buyers behind gold’s rally last year, the main driver has now switched to currency depreciation and risk-off sentiment, according to Daniel Ghali, senior commodity strategist at TD Securities.
“Central bank buying activity in gold has been a secular trend,” Ghali said. “Since 2010, I'd say, the breadth of central banks buying gold has started to increase. And the fact of the matter is, there's a really wide variation as to why these central banks are buying it.”
He listed as examples the de-dollarization trend that has become stronger since the sanctions against Russia, and other countries looking to partially diversify away from the U.S. dollar. “But I actually think that what's been more relevant in that stream of buying activity in gold this year has been buying gold as a currency depreciation hedge,” he said.
“We actually started off the year with a pretty stellar rally in the U.S. dollar,” Ghali noted. “This is very counterintuitive, but if you're a country who wishes to diversify away from the U.S. dollar, you might take advantage of those moments in time when the U.S. dollar is pretty strong in order to sell U.S.-dollar-denominated assets and buy non-U. S.-dollar-denominated assets, one of which is gold.”
“That currency depreciation pressure is really what, counterintuitively, has been fueling central bank buying activity in gold this year.”
But the greenback has since slid in value – along with U.S. equity markets – and this has changed the drivers of the gold rally once again. “Over the last few weeks, the dollar has weakened substantially, so we think this ‘mystery buying activity,’ which we've dubbed it, has stepped away.”
“But here's the beautiful part about the setup in gold this year: You actually have almost perfect diversification in terms of the large drivers of gold buying,” Ghali said. “On the one hand, if the dollar rises, the central banks’ ‘mystery buyer’ steps in. But when the U.S. dollar subsides, the Western investor cohort also tends to buy gold. That's the traditional case for purchasing gold, the inverse relationship to rates, to the dollar and so on and so forth.”
“That's what we think is really occurring today,” Ghali said. “In fact, this is a setup that should really fuel ‘fear of missing out’ [FOMO] in gold, because macro funds have liquidated a substantial amount of their holdings over the last weeks, and as gold prices break into new all-time highs, they have to reallocate into it.”
And while many have speculated that the slide in Bitcoin and other digital assets may also be driving some crypto investment into gold, Ghali said this relationship is virtually nonexistent.
“People talk about gold as a substitute for Bitcoin, and vice versa,” he said. “But the fact of the matter is, fund flows into Bitcoin ETFs are completely uncorrelated with fund flows into gold. They're two separate investment cases. What's interesting is fund flows into Bitcoin ETFs are much more highly correlated with fund flows into risk assets, so in a way, the deterioration in risk sentiment – this slump in U.S. equity markets that we've seen over the last few weeks – have actually kept risk budgets constrained.
“Macro funds haven't purchased gold in a moment of time where you would expect them to because of those constraints,” he added. “But at the same time, it's not really directly related to Bitcoin.”
Ghali has been one of the more prominent voices pointing out the breakdown of traditional correlations in the precious metals market, and with the U.S. dollar in particular. In a Feb. 12 interview, Ghali noted that a stronger dollar has historically been bad for commodities, including precious metals, but that's no longer the case.
“Gold has an exceptionally strong setup at the moment,” he said. “The best way that gold bugs can call this setup is ‘Heads I win, tails you lose.’ It's a setup in which a stronger dollar is actually acute enough to catalyze what we call ‘mystery buyer activity,’ buying predominantly out of Asia – from central banks, from retail participants, and institutional investors – that is ultimately all tied to currency depreciation hedges.”
Ghali said this has been the case for more than two years now. “When the US dollar is strong enough, it actually has a counterintuitive impact,” he said. “Conversely, if the U.S. dollar weakens [and] U.S. rates decline, macro funds now have some bullets to deploy and they're adding gold in that situation. So this is the context where heads I win, tails you lose.”
But the demand situation in Asia is actually quite different today than it was in 2023 and 2024, because China’s gold ETFs are no longer supporting the price inceases.
“What we're seeing in the last week is a significant increase in trading volumes on the Shanghai Gold Exchange,” Ghali said. “Last year, that was ultimately associated with very strong retail buying activity of Chinese-based gold ETFs. This year, that doesn't seem to be the case. It's not exactly clear what is driving it, but we think that the ultimate driver is currency depreciation pressure.”
And while TD Securities sees a very positive environment for gold right now, Ghali said the setup for silver prices is even better.
“We think the setup in silver is exceptionally strong,” he said. “This is the most compelling case in commodities markets today.”
“This isn't the silver squeeze narrative that you've heard about, this is the silver squeeze that you can buy into,” Ghali added. “What's happening here is an artificial catalyst that has forced London inventories to drain at an exceptional rate in favor of U.S. based inventory starting to rise at an incredible rate. The issue there that is unique to silver is that the U.S. just so happens to be a significant end-user destination, that silver just so happens to be in a structural deficit that is at least four years running consecutively, and that it's not exactly clear to us that the stockpile of above ground ‘invisible inventories,’ as you might call them, will come back to market at current prices. Prices actually have to rise in order to incentivize inventory accumulation from unconventional sources, in our view.”
“This is a really strong setup for silver prices,” he emphasized. “We think it's ultimately going to drive a catch-up with gold’s exceptionally strong performance last year.”
Ghali was among the earliest market experts to signal shifts in the precious metals market over the last few months. In late November, he sounded the alarm over the unwinding of massive long gold positions.
“We now expect imminent buying exhaustion,” Ghali warned. “From a macro perspective, the Fed's discounted path is no longer likely to lead to an 'overly easy' policy stance, suggesting that macro fund interest is unlikely to return towards extreme levels.”
“Price action has finally been sufficiently strong to force CTAs back into an effective 'max long' position size, suggesting that every single trend signal on our radar is already pointing long, which will, in turn cap subsequent algo buying activity,” Ghali noted. “And, the TINA trade is still reversing in China, suggesting that Asian demand won't save the day.”
“The set-up for flows in silver is notably superior,” he said.
Then, on Jan. 7, Ghali warned investors of an unprecedented situation unfolding in the silver market.
“It's hard to see it in flat prices, but over the last month there's been a huge disruption in precious metals markets where the threat of universal tariffs on metals is leading traders around the world to bring metal in from London and other global venues into the U.S., only to hedge against the risk that tariffs will be implemented on precious metals,” he said. “Historically, they haven't – precious metals have been considered money in effect – but if they were to be subject to tariffs, then traders holding short positions against metal that they actually hold somewhere else in the world would be subject to substantial losses.”
“In order to hedge against that risk, they're bringing metal into the U.S.”
Gold prices are continuing their strong recent performance on Wednesday, with spot gold setting a new all-time high of $3,045.41 at 1:45 am EST.
Spot gold last traded at $3,029.29 per ounce for a slight loss of 0.16% on the session.
