Gold gave back less than expected given a strong dollar and profit-taking, as a positive outlook and higher risk constrained outflows. Uncertainty in bond markets is likely to fuel interest in gold in January

Analysis by the World Gold Council.

Gold gave back a little more of its y-t-d gains in December, finishing down 1% on the month, but up 26% on the year (Table 1). See our recent blog on a FY review. 

According to our Gold Return Attribution Model (GRAM), the primary driver for gold’s decline was a strong rally in the US dollar index (opportunity cost FX) which finished the year at its high (Chart 1). Softening gold’s drop were a rise in breakeven inflation expectations and the Geopolitical Risk index (risk & uncertainty), likely on the back of martial law declared in South Korea, as well as small global gold ETF inflows (momentum). 

Global gold ETFs eked a US$778mn (4t) gain in flows thanks to strong Asian ETF buying, significantly offsetting outflows in North America during December. Those outflows were quite benign given the weakness in November and the prospect of profit-taking following such a strong year. A positive sell-side outlook for gold probably helped constrain a bigger end-of-year shift out of gold.¹ Profit-taking also likely occurred in futures, where somewhat extended managed money net longs shed US$4bn (-49t) over the month taking total net positions down to US$65bn (764t).

Chart 1: Gold gave back a small portion of its 2024 gains in December, driven by US dollar strength

• Hawkish Fed spurs profit-taking but also signals interest rate uncertainty
• Bonds are set to stay on shaky ground, and this should help gold at the margin
• Short term, gold may need to consolidate in Q1 2025 as technicals signal that it resides in overbought territory.

Fed puts punch bowl back in the fridge

A 25bps Fed policy rate cut in December, doused with further hawkish guidance, resulted in sizeable intraday wobbles in equities, US Treasuries and gold (Chart 2). The S&P 500 fell by 3%, and the 10-year Treasury yield marked the largest FOMC-meeting move since 2013. Gold dropped by over 2%. Undoubtedly, the Fed’s sober messaging prompted some investors to take profit following a stellar year for equities and gold, with tax-loss selling an additional incentive to cut equity exposure.

Chart 2: The Fed gave markets a reality check in December. Gold wasn’t spared either

Intraday price reaction in US equities, Treasuries and gold following FOMC meeting in December

The reaction probably also reflected some pent-up uncertainty that markets, as well as the Fed, soon face a change in personnel at the helm of the US economy come January 20. While the FOMC members are somewhat confident in where interest rates will be at the end of 2025 – they are unusually divided on where rates will be at the end of this cutting cycle (Chart 3).²

Chart 3: Fed officials are uncertain where this cutting cycle will end

Dispersion of FOMC outlooks for long-term policy rate*

Chart 4: High interest-rate uncertainty goes hand in hand with a higher term premium

Long-term Treasury estimated term premium and interest rate uncertainty (MOVE index)*

Over the past two years, a breakdown in the relationship between gold and real interest rates has been on display (Chart 6). We have in the past attributed the phenomenon largely to emerging market central bank buying and geopolitical risk premia. But perhaps bond uncertainty has also played a role. 

Chart 5: Bond uncertainty may have played a role in the breakdown of the yield-gold relationship

Simple gold model, actual gold price (US$/oz) and MOVE index*

Chart 6: Yields less of a drag on gold returns when uncertainty is high

Average gold returns during yield and interest rate uncertainty (MOVE index) regimes*

Thus, alongside central bank demand and geopolitical risk, it may further explain why the traditional simple real rate model hasn’t been quite as accurate over the past two or so years as it was post the global financial crisis up to 2022. Until debt concerns, a drive by central banks to continue their diversification of reserves, and geopolitical risks wane, gold is unlikely to take much of a negative cue from bond yields.

To add fuel to the fire, bond market uncertainty might get amped up in January again as the Biden administration carves out its last twenty days in office. And debt ceiling jitters are set to resurface in the middle of the month when the Treasury could be forced into extraordinary measures to avoid a debt default, as warned by the incumbent Treasury Secretary, Janet Yellen.⁵

Technical handbrake

While uncertainty provides some wind beneath gold’s wings, we take note also of the pressure that a stellar year like 2024 might exert on the price going forward. Technically, gold will have to battle what looks like overbought territory for some time (Chart 7).

The long-term structural uptrend may get challenged in early 2025 as monthly momentum indicators suggest a “sell” signal after five months in extreme overbought territory, with similar signals seen at the peaks in 2006, 2008, 2011 and 2020. Longer term, the core uptrend looks well cemented and any near-term weakness could be viewed as an opportunity for investors to re-engage in gold at more attractive levels.⁶

In summary

Bond uncertainty may mean that gold is less likely to dance ‘negatively’ to the tune of bond yields for the foreseeable future. That is good news. But gold’s stellar performance in 2024 may leave it facing a near-term uphill struggle as technical indicators suggest it is overbought. That said, given that the longer-term trend is intact, it could present investors with the opportunity to engage at more attractive levels.

Chart 7: Gold appears technically overbought on monthly signals, and may need to consolidate

Gold price (US$/oz) and its Relative Strength Index*

Sources: Bloomberg, World Gold Council
*Monthly data to 31 December 2024. Relative strength is a technical oscillator indicator 
comparing average gains(losses) to previous price levels. Annotations are our own.

Footnotes

¹Gold set to rally further this year, say Wall Street banks | Financial Times.

²Federal Reserve’s flip-flops risk undermining US exceptionalism | Financial Times.

³There is also a feedback loop from the Move index to the term premium, whereby increased uncertainty raises the compensation investors require from long duration bonds | BIS.

⁴We are aware that much of this period coincides with central bank net buying and a positive bond equity correlation so disentangling the effects is non-trivial.

⁵Janet Yellen warns Congress US could hit debt limit in January | AP News

⁶ It is important to recognise that a move into overbought territory itself is not a signal that a trend is about to reverse or a correction/consolidation emerge, far from it. Indeed, such a move reinforces the strength of the core trend. It is when this momentum measures moves lower and out of overbought territory (below 80) when the indicator itself gives a “sell” signal. The use of the word “sell” though needs to be qualified, as a “sell” signal for a momentum indicator at its heart simply implies the trend is unlikely to continue at its current pace. It could signal a reversal lower and a meaningful correction, or a sideways phase, it could also though signal the trend will continue higher, but a much slower pace.

This article is a re-post from here.

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