While the expectations for rate cuts have diminished lately amid persistently high inflation, gold prices have continued to exhibit strength due to various underlying positive factors, Macquarie commodity strategists said in a report.
The research firm observed that gold prices have reached new highs, driven by dynamics other than U.S. interest rates and the dollar. The yellow metal has benefited from a broader risk-on sentiment in the metals markets.
Gold prices have been outperforming across various asset classes and on a macroeconomic level. It is implicitly trading on its reputation as a safe asset with no counterparty risk, rather than the opportunity cost associated with holding a zero-yield asset.
Moreover, gold prices have been supported by risk assets. Macquarie highlighted that central bank buying of gold is still tracking above reported levels, suggesting sustained institutional interest in the precious metal.
The derivative markets for gold remain long, especially when measured in U.S. dollar notional amounts rather than in lots. However, the market positions are believed to be less overstretched following two recent price corrections.
Trading volumes on the Shanghai Futures Exchange (SHFE) have settled down after a significant increase in April, but the China "arbitrage" remains high, indicating continued interest and activity in the gold market from Chinese traders.
The resilience of gold prices, despite a stronger dollar supported by relative U.S. monetary policy divergence, indicates that investors are looking beyond just the U.S. rate market when it comes to gold.
Elsewhere, industrial metals have also seen a catch-up to gold's performance, as reflected in the gold/silver ratio, with gold setting the pace for commodities and now industrial metals taking the lead.