That said, there are signs that this may not last forever. The massive lift in Chinese demand, soaring physical premiums in Shanghai and the persistent backwardation of GOFO, in light of heavy ETF selling, means we should not be complacent about gold making un unusual move against things like the US Dollar and interest rates.
Looking at modelled outcomes of gold vs. actual (details of the model can be found here) suggests the recent rally has not been anything out of the ordinary. The model suggests prices should be a little higher, but it has done for a while, so there is nothing strange about that.
This is different to the March collapse, which initially was completely out of sync with other markets. But as discussed here, this is now largely corrected.
Looking more closely at our key variables of the US dollar and TIPs, things look pretty conventional. Gold vs. the US Broad TWI has remained in its recent band as shown on the left.
This also gels with TIPs, which have rallied as markets become less certain of the next move from the Fed.
Short bets on gold have also been pared in recent weeks, with precious metals in general benefitting from a short covering rally.
While gold's performance has been stable, it is worth considering what may cause the status quo to break down. Over the last 30 years or so, this has been around big shifts in the macro-financial environment, like the credit crunch in 2009/09, or the bearish shift in prices in the early 90s as inflation expectations were shifted lower.
There is a risk at the moment that gold is closer to a change in behaviour than it has been for sometime. Unusually this has more to do with seismic shifts in physical demand as prices have fallen rather than the bigger macro picture.
The key signal is the persistent backwardation in GOFO (which I wrote about more extensively here, but basically means that there has been a big shift between borrowing gold and borrowing money). Given this remains in play for over a month means it is probably more meaningful than it is perhaps given credit.
This to a large part seems to be driven by soaring Chinese demand. Chinese and Indian appetite for gold has always been put up as a bullish by goldbugs, but there is now actually evidence that this is starting to have a real impact on the market. This is even more impressive given ETF volumes continue to fade, albeit at a slower rate.
So those who are expecting gold to drop further as interest rates rise and the dollar strengthens will have to be aware of the risks that the game very well could change. While this change is not definitive, its definitely worth monitoring.
