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Market, Macro Forces Support Recent Gold Rally

Gold prices reached six-year highs this week as key market and macro factors that have been brewing in recent weeks came together to help boost the precious metal’s allure.

Heightening tensions between the U.S. and Iran, continued uncertainty about the pace of global economic growth amid the trade battles, and recent U.S. dollar weakness have been supportive for gold’s strong rally.

Gold prices are up 7.54% this month and 8.59% for the second quarter thus far through June 26. Both would represent the best performances since 2016. Gold prices have since pulled back a bit from six-year highs, closing on June 26 just shy of $1,413 an ounce (on a continuous contract basis).

A big support for rising gold prices has been U.S. dollar weakness. A four-month rally for the U.S. dollar that began in late January through May has broken down this month. After gaining nearly 3.00% during that time period, the Wall Street Journal Dollar Index is down nearly 1.85% from its late May’s highs through June 26.

The dollar’s two main support mechanisms ─ higher U.S. government bond yields and strong domestic growth ­─ have been breaking down in recent weeks. This, along with a more dovish Federal Reserve, has boosted gold’s importance as a safe-haven asset and store of value, essentially an asset’s retention of purchasing power over time.

Trading data show a big uptick in gold buying this month. Analysis of the U.S. Commodity Futures Trading Commission’s Commitments of Traders reports by Saxo Bank in Hellerup, Denmark show that managed funds increased their net long positions in gold by 21% in the seven-day period ended June 18. That represents a 16-month high, while a record number of contracts have also been purchased during the past three weeks.

Ole Hanson, Saxo Bank’s head of commodity strategy, says the short-term focus now is on whether gold can hold onto its gains, reassuring “new longs” that they haven’t bought another high, but instead a new potential low. “With that in mind the 2016 high at $1,375/oz and 2018 high at $1,366/oz are now the key technical levels that need to hold in order to avoid profit taking,” he wrote in a June 24 Insights post.

Lower Rates, Dollar Weakness Would Support Gold Prices

The recent data from the Commitments of Traders report was released before the June 19 conclusion of the Federal Reserve’s two-day meeting. While the Fed kept short-term interest rates unchanged, it did say that uncertainties about its outlook for continued economic expansion have increased and that it would monitor the implications of incoming data and act as appropriate to sustain the expansion.

Growing expectations that the Fed will cut rates have helped drive stock prices higher in recent weeks. Lower interest rates in the U.S. and further accommodative central bank policy across the globe would be positives for gold. Lower interest rates help reduce the opportunity cost of owning gold – as it is a non interest bearing asset – as well as the carrying cost, or rate on loans, for those investors funding gold purchases through borrowing.

A long-time gold bear who has recently changed his view on the precious metal is Marc Chandler, managing partner and chief market strategist at Bannockburn Global Forex. He says the general market consensus is that central bank interest rates will be lower longer, while a growing amount of sovereign debt offers investors negative yields.

“There are roughly $13 trillion of negative yielding bonds. In the US, the market is pricing in 75 bp [basis points] of cuts in the Fed’s next four meetings. Other countries, bar a few, are considering easing policy. If rates are going to be lower for longer, the opportunity cost of owning gold falls,” he wrote in his Marc to Market blog.

Another positive for gold is what is growing consensus, in some circles, that the strong dollar rally is due for a correction as the greenback appears overvalued compared to other developed nations’ currencies. This post earlier this month on CNBC written by James McCormack, global head of sovereigns and supranationals at Fitch Ratings, discusses the possibility of the dollar losing its special status as the world’s reserve currency. Among the trends has been a pickup in central bank buying of gold in 2018, which has continued in 2019.

Chandler writes that years of no central bank intervention in the foreign exchange market has led to the dollar becoming overvalued because that is how the market’s “purported” self-correcting mechanism works. “The rise in US rates, the fiscal stimulus, strong growth, high profitability, drew the world’s savings to America,” he said in the blog post.

“As a consequence, the dollar appreciated. The OECD [Organisation for Economic Co-operation and Development] currencies usually do not venture beyond 20%-25% of its measure of purchasing power parity,” Chandler writes, noting that the euro is currently about 22% undervalued, according to the OECD.


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Hansen, O. (2019, June 24). COT: Record gold buying pace continued ahead of FOMC. Saxo Bank A/S. Retrieved from:

Chandler, M. (2019, June 25). Cool Video: Sketch of Bullish Case for Gold. Marc to Market. Retrieved from:

Sources for Market Data:

Gold Prices:

The WSJ Dollar Index:

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