Gold Prices Up Despite Higher Rates, Stronger U.S. Dollar. This is How.

By:Ilya Spivak

Gold prices managed to rise despite higher interest rates and a stronger U.S. dollar. A buying spree from China seems to explain why.

  • Gold prices have rallied despite higher interest rates, stronger U.S. dollar.

  • Futures and ETF positioning hints at soggy speculative appetite for gold.

  • China seems to be the buyer driving the market as it builds gold reserves.

Gold has enjoyed a blistering rally in recent months.

In March, prices punched through the top of a multi-year range that contained them for nearly four years, marked by the August 2020 high set just below the $2,100 per ounce level. Since the start of that month, they have rallied as much as 19.3% to touch a record high above $2,400 per ounce.

The forces driving the rally appear to be somewhat confounding.

Gold typically acts as a foil for the path of interest rates and the U.S. dollar. This makes sense. The metal confers upon its buyers a yield of 0. Rising rates offering positive interest income streams on other assets make it unattractive by comparison.

Similarly, a stronger greenback undercuts the appeal of an alternative store of value to fiat currency.

Is gold affected by rising rates and a stronger U.S. dollar?

The latest rally has pointedly decoupled from these long-standing dynamics. Rates have marched higher since the beginning of the year as markets responded to a run of hotter-than-expected U.S. economic data, which markets interpreted as reducing scope for Federal Reserve rate cut expectations. The dollar rose in tandem.

Futures Implied 2024 Fed Outlook versus U.S. Dollar
Data source: CME

What’s more, data tracking the markets’ speculative appetite for gold suggests the absence of the kind of bullish upswell that might have accompanied the metal’s heady gains this year.

Futures positioning data that the Commodity Futures Trading Commission (CFTC) publishes in its Commitment of Traders (COT) report shows net speculative longs have languished in a range since April 2023 even as prices soared. Meanwhile, gold holdings in the bellwether SPDR Gold Shares ETF (GLD) have dropped to a five-year low.

Gold price rally: who’s buying?

That gold is not responsive to familiar macro catalysts seems to line up with the sense that speculative interest is not the primary impetus for price gains. However, the change in trading patterns seems to line with an accelerated pace of gold reserve accumulation by China.

The pace of buying by the East Asian giant’s central bank began to accelerate in the second half of 2022 and ramped up to 11.2% year-on-year by the end of 2023, the highest in eight years. It is unclear why Beijing embarked on this buying spree. But while it continues, even the usual headwinds seem unable to check the rally in a lasting way.

Gold: China Reserves Versus Prices
Data source: MacroMicro

Ilya Spivak, tastylive head of global macro, has 15 years of experience in trading strategy, and he specializes in identifying thematic moves in currencies, commodities, interest rates and equities. He hosts Macro Money and co-hosts Overtime, Monday-Thursday. @Ilyaspivak

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