MW Gold hasn't been acting like it normally does. What that means for investors.

By Myra P. Saefong

Gold futures and the U.S. Dollar Index have both climbed by over 3% this month

Gold hasn't been acting like it normally does - and it has some good reasons to shake off its typical inverse relationship to U.S. stocks, the dollar and Treasury yields.

"Having behaved 'normally' over the summer, gold has slipped back into anti-traditional-driver mode in recent weeks," wrote David Oxley, chief climate and commodities economist at Capital Economics, in a note dated Friday.

Gold prices (GC00) have climbed by more than 3% so far this month, with the strength in the metal coming alongside sharp rises in U.S. Treasury yields and the dollar, he said.

Read: Gold's record-breaking run comes as stocks hit fresh highs. Is it too late for investors?

A stronger dollar tends to pressure prices for commodities, like gold, that are priced in the unit, making them more expensive to users of other currencies, while higher Treasury yields raise the opportunity cost of holding assets that don't pay interest. So far this month, the ICE U.S. Dollar Index DXY has gained more than 3%, FactSet data show. In Thursday dealings, the yield on 10-year Treasurys BX:TMUBMUSD10Y was up 57.9 basis points from its 52-week low of 3.622% on Sept. 16.

Despite that strength, gold futures (GC00) rose to record settlement and intraday highs on Oct. 22, with the December contract (GCZ24) settling at $2,759.80 an ounce after trading as high as $2,763.30 on Comex.

"Gold is basically ignoring a stronger dollar and rising Treasury yields," Michael Armbruster, co-founder and managing partner at Altavest, told MarketWatch. He believes that indicates physical demand for gold is "strong overseas, primarily from central banks that are committed to dedollarization of their reserves."

Similarly, Oxley pointed to speculation that the continued strength in gold is a "wider paradigm shift driven by BRICs+ central banks beefing up gold reserves to reduce reliance on the U.S. dollar," he said. BRICs refers to an intergovernmental organization that includes Brazil, Russia, India and China.

But "perhaps the most convincing argument to 'rationalize'" gold's latest price moves is that they're part of a "wider 'Trump trade' as markets adjust to a higher probability being assigned" to a U.S presidential election win for former President Donald Trump, said Oxley.

"If you're worried about fiscal profligacy, financial repression and attacks on [Federal Reserve] independence, gold would be an attractive asset," he said.

Read: Why gold is still attractive after another all-time high this week, according to UBS

Concerns over the potential for an upcoming recession are also in play.

In a recent interview, Jim Rogers, chairman of Beeland Interests Inc., who co-founded the legendary Quantum Fund with billionaire George Soros in the 1970s, told MarketWatch that the U.S. economy is getting closer to suffering an "extremely bad" recession.

He pointed out that gold and silver have "always been places for people to hide during economic turmoil," so both will likely do well. The strength in gold seems to suggest that there's a possibility of more money-printing and all sorts of potential problems out there, he said.

Read: Investing legend Jim Rogers expects an 'extremely bad' recession. Why he's buying silver instead of gold.

But with gold prices near an all-time high, and silver prices (SI00) (SIZ24) still significantly down from their record high, Rogers said he would be more likely to buy silver than gold.

Read: Silver's scarcity factor is helping it catch up to gold's record run

Also read: Why U.S.-Russia tensions have sent palladium prices soaring

Armbruster, meanwhile, said U.S. budget deficits are running close to $2 trillion per year and are expected to increase in the coming years even without a war or recession, so "investors are deciding that gold is a more attractive bet."

'We think gold could still be in the early innings of a major rally.'Michael Armbruster, Altavest

Investors are also "coming around to the realization that inflation is likely to reaccelerate in coming months, hence rate-cut expectations are coming down," he said. "We think gold could still be in the early innings of a major rally."

Oxley, however, urges caution.

"Economic gravity has a habit of reasserting itself and we would stress that gold is not a one-way bet," he said. "The fact that people are increasingly attributing gold's rally to the 'fear of missing out' - psychology typically present during bubble mania - is surely a bit disconcerting," said Oxley.

Given that, he said Capital Economics is in "no rush" to change its end-of-2025 gold forecast of $2,750 an ounce, and still thinks there's a "good chance of a sizeable price correction between now and then."

-Myra P. Saefong

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October 25, 2024 13:54 ET (17:54 GMT)

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