Gold makes new high above $2,400. What it means for USD.

Key points

• Gold futures hit $2,450 intraday to mark a new all-time high
• Geopolitical tensions and institutional demand have spurred the gold rally in 2024
• The 12-month correlation between gold and US dollar has weakened to near -0.25
• the 3-month correlation is even weaker at -0.20

Gold futures hit $2,450 to start the week

Gold futures experienced a significant rise to open the trading week, quickly surpassing $2,450 on a Sunday night during the Asian trading session. This marked a new all-time high for gold, building on an already impressive 2024, which started the year around $2,000/oz.

How did gold get so expensive?

The surge in gold prices in recent years can be attributed to numerous factors of varying degree but the breakout story centers around geopolitical tensions and substantial acquisitions by central banks. The outbreak of war in the Middle East last fall, combined with the ongoing Russian-Ukraine war, spurred gold demand as investors pivoted into traditional flight-to-quality assets. In an added layer, the sanctions against Russia and the threat of further trade barriers have spurred many central banks to increase their allocations of gold in their portfolio in an attempt to diversify their exposure from any nation's currency. This trend is particularly pronounced in China, where the People's Bank of China led central banks in gold purchases in 2023 (Source: World Gold Council).

Another interesting trend has been a rise in the purchase of physical gold by individual consumers. Most notably, Costco began selling 1-ounce gold bars to its customers last August, which continue to sell out shortly after each new release. These bars are now estimated to generate $100 million - $200 million a month in revenue for the retail club (Source: Wells Fargo). Consumer data in Asia shows a similar trend of an uptick in physical gold purchases of jewelry, bars and beans.

US dollar less correlated to gold in recent months

Historically, gold and the US dollar share an inverse relationship as investors must select a safe-haven asset to hold - trading in their US dollars for gold and vice versa. However, recent data suggest a shift. The three-month correlation shows a -0.20 compared to the twelve-month (shown below) slightly stronger than -0.25, indicating a less pronounced inverse correlation recently. This change might influence traders to reassess their strategies in hedging and trading these assets.

12-month rolling correlation: Gold - USD

Recently, both markets have hit historic highs

Despite a recent drawback in the US dollar, it reached year-to-date high in April—simultaneously, gold also surged to new highs. This concurrent rise challenges the traditional market dynamics where usually one rises as the other falls. Such trends could suggest a temporary decoupling or a broader economic shift affecting both assets.

Can both gold and USD continue to rise?

In the current nuanced market environment, it's conceivable that both the US dollar and gold might continue moving in tandem, either upwards or downwards. Potential rate cuts in the US stemming from lowering inflation could weaken the dollar, reducing its appeal, while lessening demand for gold as an inflation hedge. Meanwhile, persistent geopolitical tensions could maintain or increase demand for gold as a safety asset.

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