Gold price rise: Baffled by the increase, Chris Wood in Green and Fear explains likely reasons behind it

Gold prices have experienced an upward trajectory in recent months, surging by approximately 29 percent since October. Moreover, due to robust US inflation data and speculation surrounding a potential rate cut by the US Federal Reserve, gold prices today (April 12) witnessed a surge to unprecedented levels in both domestic and international markets. The Comex gold price soared to a record high of $2,412 per troy ounce, while the spot gold price reached a new pinnacle of $2,395 per ounce during early deals.

Even though baffled with the recent surge in gold prices, Chris Wood of Jefferies in his Greed and Fear report tries to explain the likely reasons for the same, as reported by CNBC-TV18.

Read here: Gold prices hit all-time high on strong US inflation figures, Fed rate cut buzz

Chris Wood believes the recent increase in gold prices is primarily driven by strong demand from China, alongside a notable absence of significant investor enthusiasm for the yellow metal.

"Recent developments show a distinct lack of investor euphoria as regards gold, the question remains what is driving the current rally? The most plausible explanation remains demand from China. Still, there is a lack of concrete data to confirm such an explanation," he said.

The usual correlation between gold prices and inflation seems to be defying expectations, highlighted Wood. Despite a global uptick in inflation, the pace of overall price increases has moderated. Surprisingly, however, gold prices have continued to rise, puzzling experts like Wood.

Read here: Why Chris Wood sees 7% real GDP growth and 12-15% earnings growth going forward

Moreover, the unexpected surge in American inflation during March pushed the US dollar to its highest level in 34 years. Traditionally, as commodities such as gold and oil are priced in dollars globally, a strengthening dollar tends to suppress commodity prices. Yet, recent trends have contradicted this assumption. While the surge in oil prices can be rationalised by OPEC's supply constraints, the underlying reasons for the upward trajectory of gold prices remain unclear.

"Greed and Fear have no idea who or what was behind such a trade, save to note that a soaring gold price is not in the interest of the relevant authorities any more than a surging oil price is. Gold is up by 29 percent since early October and by 18 percent since mid-February, while the Brent crude oil price is up by 25 percent since mid-December," Wood stated.

Read here: Greed and Fear index: Chris Wood adds Airtel, reduces weights in RIL, HDFC Bank

Why does Chris Wood find the surge in gold prices surprising?

Firstly, there is a noticeable absence of inflows into gold ETFs in the Western world, with holdings declining by 120 tonnes a year to date to 2,542 tonnes as of Wednesday, following a decrease of 254 tonnes in 2023, as reported by Bloomberg.

Secondly, the physical premium on gold bars and coins traded in Singapore stands at a relatively normal 1-2 percent, contrasting sharply with the 7-8 percent levels observed during the peak of the last bull market in 2011 and 2012.

Then, there is no indication of a sudden uptick in sales of American Eagle Bullion coins, a popular series in the US, with sales actually declining from 19,500oz in February to 12,000 oz in March, marking the lowest level for March sales since 2019. Although gold mining stocks have experienced a rally this year, they are not significantly outperforming bullion, contrary to expectations in a booming bull market, such as what occurred during the 2001 to 2011 period.

Read here: 'Modi's Reforms Changed India's Macros, Economic Gamechanger', Says Top Jefferies Analyst Chris Wood

Despite this, gold mining stocks remain exceptionally inexpensive based on the current bullion price, with the NYSE Arca Gold BUGS Index trading at the same level as in December 2005 when the gold price was approximately US$500/oz.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.