It’s
been very hard to reconcile the recent upside move in gold based on the
fundamentals.
XAUUSD (9 April 2024)
I don’t
think that rate cut expectations make sense for the move, as gold waited for
markets to start pricing out Fed cuts before the move higher started.
Some are
pointing to central bank buying, while others point to inflation hedging (don’t
get me started on this one).
But I think
majority of the move has simply been a momentum play.
At some
stage momentum takes over, which makes chasing it at the highs unattractive,
and fading at the highs too dangerous.
The options market is getting a bit more
cautious of the recent rally though.
XAUUSD Risk Reversal 2024_04_09 (10_52)
This chart
shows gold spot in blue and 1-month 25 delta risk reversals for gold in red.
Notice the
divergence between spot and risk reversals, with risk reversals showing
increased demand for puts.
This isn’t
enough to get short gold on its own, because a big miss in US CPI could see
risk reversals catch up higher to spot.
What it does show is that if we should get a big
upside surprise in CPI, it could be enough to cause a dent in the recent relentless
bid in gold.