Is gold losing its shine?

After a strong rally in the first ten months of the year, the price of gold has fallen sharply following the US presidential election. In this Macro Flash Note, Senior Economist GianLuigi Mandruzzato looks at the outlook for the price of the yellow metal.

The performance of the gold price in 2024 has been surprising, reaching a record high of USD 2800 per ounce (po) towards the end of October. The 30% rally since the end of 2023 has far exceeded that suggested by the fundamental drivers.¹ Our model underestimated monthly changes in the gold price in eight of the first ten months of 2024, and in three of them the underestimation was close to or greater than 5% (see Chart 1).

Source: World gold Council and EFGAM calculations. Data as at November 15, 2024.

Gold price valuation remains stretched

Interestingly, the World Gold Council (WGC) model shows similar estimation errors (see Chart 1). Compounding the monthly residuals since January shows the price of gold being around 20 percentage points higher than supported by fundamentals as at end October. Starting from such an expensive valuation, the gold price drop of around USD 250 po, or almost 9%, that followed the US presidential election is not surprising. Indeed, it is encouraging that based on data available so far in November, the sign of our model residual is opposite to those prevailing in the previous months.

Source: LSEG Data & analytics and EFGAM calculations. Data as at November 15, 2024.

Yet, at around USD 2590 po the price of gold continues to look overvalued (see Chart 2). This also reflects the adverse impact on the estimated gold price of the evolution of its fundamentals after the US election. The US dollar appreciated, real yields on US government bonds rose, and the Vix index of S&P500 options implied volatility declined. These were only partially offset by the increase in market-based US inflation expectations.

The gold trade become crowded

To gain further insight into the recent dynamics of the gold price, it is useful to consider how net traders’ commitments have evolved. Traders’ positioning can be seen as a proxy for investors’ interest in a trade. According to CFTC data, in early 2024, traders’ net long positions on gold were 0.6 standard deviations below the average since 2010, but by the end of September they had risen to 1.7 standard deviations above the historical average (see Chart 3).

Source: LSEG Data & analytics and EFGAM calculations. Data as at November 15, 2024.

The sustained increase in investor flows towards gold could have been motivated by genuine expectations of an increase in its price, investors seeking to take advantage of the upward momentum in the gold price, or investors’ desire to hedge geopolitical risks. In any case, it has supported the gold price. However, the surge of net long positions shows how crowded the gold trade has become.

Normalising gold exposure to keep prices weak

It should be noted that since 2010, extreme net long trading positions have been short-lived. During the normalisation process, the gold price has either had significant corrections, as in 2013, or remained rangebound for extended periods, as in 2017-18 and 2021-22.

It is therefore interesting to note that traders’ net long positions have declined sharply in the last few weeks. However, as of 15 November, the net long positions remained almost one standard deviation above the historical average, suggesting that the normalisation of traders’ exposure is far from complete. In this context, in our view it would not be surprising if the gold price remained weak or rangebound for some time.

¹ See “Is the gold price rally sustainable?”, EFG Macro Flash Note, June 5, 2024. https://www.efginternational.com/uk/insights/2024/is_the_gold_price_rally_sustainable.html

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