Gold prices have surged in recent weeks, rising from $1,800s per troy ounce on October 10 to the highest of more than $2,000 per troy ounce on October 31, 10.85% increase in price that occurs within just three weeks. This rally has been driven by a number of factors, including increasing demand from smart money investors and a looming recession.
Gold Price and Commitment of Traders
Source: Barchart (https://www.barchart.com/futures/commitment-of-traders/interactive-charts/GC*0) 13
Pay attention to the green line area that shows the rise of gold price along with what shown in The Commitment of Traders report. The report shows that large speculators, also known as non-commercials, have increased their net long positions in gold significantly in recent weeks. The details of the number is below:
Source: Barchart (https://www.barchart.com/futures/cot-reports/metals?view=noncommercial) barchart
From October 10 to October 31, non-commercial net long positions increased from 71,433 to 148,385, CAGR 27.59% per week! This suggests that smart money investors are betting on higher gold prices in the near future.
FYI, a gold Commitment of Trader (COT) report tabulates the holdings in gold derivatives and can be obtained from CFTC website. COT reports may reflect almost the whole image of an asset, it tells the aggregate holdings of different important market players in the U.S. futures market.
COT report data is supplied by reporting firms (FCMs, clearing members, foreign brokers, and exchanges). It indicates the positions, both long and short, in various derivatives contracts, and which type of market actor is involved.One that should be consider is the position of the large speculators that really moves the market.
One reason why smart money investors are bullish on gold is the inverted yield curve. The inverted yield curve is a well-known indicator of a looming recession.
US Treasury Yield Curve 10Y, 2Y, 1Y, 3M
Source: US Treasury Yield Curve (https://www.ustreasuryyieldcurve.com/charts/treasuries-time-series) 10
In the normal state of affairs the yield curve is not inverted, it means that long-term interest rates are higher than short-term interest rates and it is generally considered to be a sign of a healthy economy. But now we can see that 10 Year treasuries gives less attractive yield than shorter-term treasuries; 4.81% compared to 5.62% on 3M bonds and 5.49% on 1Y bonds. This is unusual, as investors typically demand a higher return for taking on more risk. As a result, short-term interest rates are higher than long-term interest rates creates an inverted yield curve and it is often seen as a sign of a recession, a sign that investors are expecting economic growth to slow down in the future and that interest rates will be cut. An inverted yield curve has been a reliable indicator of past recessions. See below charts:
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According to the pictures above, every US recession since 1978 or as many as the past 7 recessions were preceded by inverted yield curve. Today we see again the yield curve inverts and already last for almost a year since November 2022 (source: https://www.ustreasuryyieldcurve.com/). However, an inverted yield curve alone does not guarantee a recession will occur. It is simply a warning sign that investors should be aware of.
In relation to that, gold is often seen as a safe haven asset in recessionary environment. Gold is seen as a store of value that can protect their wealth from inflation and currency depreciation. In addition to the inverted yield curve, there are a number of other factors that could support higher gold prices in the near future. These include:
- Rising inflation: Inflation is on the rise around the world, and this is eroding the purchasing power of edict currencies. As a result, investors are turning to gold as a way to cover their wealth from inflation.
Rising Inflation in Some Countries (Source: IMF's World Economic Outlook, October 2023 report https://www.imf.org/en/Publications/WEO/Issues/2023/10/10/world-economic-outlook-october-2023)
- United States 8.2 in 2023 vs 7 in 2022
- United Kingdom 10.1 in 2023 vs 9.4 in 2022
- Eurozone 9.9 in 2023 vs 8.6 in 2022
- China 2.8 in 2023 vs 1.5 in 2022
- Geopolitical pressures: Geopolitical pressures are also on the rise around the world, and this is also boosting demand for gold. Gold is frequently seen as a safe haven asset during times of geopolitical query.
- Central bank buying: Central banks around the world have been buying gold at an adding pace in recent times. This is also supporting gold prices. (World Gold Council's Central Banks Gold Reserves report https://www.gold.org/goldhub/data/gold-reserves-by-country)
Gold as a Safe Haven Asset
You may know that gold is a lesser favorite investing asset for Buffet and Munger as they argue that gold, physical gold to be precise, doesn't yield anything. If you keep it like 100 days, your 100 grams gold will never be like 110 grams or so. To have gold in a good amount in your house is also dangerous and to keep it in a safe deposit box in a bank requires fee.
Despite Buffet and Munger's criticism, when an economic weakness is seen which is historically preceded by an inverted yield curve, gold is a safe haven that is not correlated to other decresing asset classes during recession such as stocks, bonds and real estates.
Moreover gold can hold its value or even increase in value proven with a long history of holding its value over time. This is because gold is a finite resource that cannot be easily inflated.
Gold Stocks For Better Investing Options
When you seek for better option in collecting gold, you can turn from physical gold to gold stocks that yield dividends for you. Gold stocks offer some advantages: less expensive to store, more liquid for you to buy and sell easily. Below is a list of some gold stocks that give a good dividend yield:
- Newmont Corporation (NEM, Financial): 5.5% dividend yield
- Barrick Gold Corporation (GOLD, Financial): 4.5% dividend yield
- Agnico Eagle Mines Limited (AEM, Financial): 4.0% dividend yield
- Franco-Nevada Corporation (FNV, Financial): 3.5% dividend yield
- Royal Gold, Inc. (RGLD, Financial): 3.0% dividend yield
Those are just some of gold stocks that offer dividend yields to the holders and investors should do their own research before selecting their favorites.
Conclusion
The outlook for gold is bullish in near future as large speculators have shown their rising interests to gold as reflected in the Commitment of Traders report as in October 2023.
The bullish price of gold may be caused by several reasons: the U.S. treasury yield curve is in inverted mode since November 2022 that yields on 10Y bonds are less attractive than yields on shorter-term bonds. Geopolitical tension which is on the rise in the world helps gold price to be bullish. Central banks buying gold, this already happen in recent years, increase the chance of gold make another high.
By the elaborated reasons above, to add gold to your investment portfolio is recommended and worth considering now and then. Investors may opt for physical gold or gold stocks if you want a yielding option.
