The current record-breaking purchases made by central banks have contributed to supporting the price of gold. However, according to Chris Watling, Chief Market Strategist at Longview Economics, there is a new emerging case for why investors should continue to hold gold. Watling explains that there is no clear correlation between the level and growth of central bank purchases and the direction of the gold price. Instead, he suggests that the gold price has been highly correlated with a macro-driven gold model that focuses on TIPS, interest rate expectations, and the performance of the U.S. dollar.
Watling raises the question of why this relationship has broken down over the past year and a half. Some argue that it reflects significant buying by central banks, while others believe it is due to the distortion of TIPS yield itself. These differing viewpoints contribute to the building case for gold to resume its rally. Watling points out that gold is currently oversold and has returned to its 200-day moving average support level, making it an attractive long opportunity. From a fundamentals perspective, gold is primarily driven by rate expectations, real TIPS yields, and the dollar. While the outlook for the dollar may be less favorable for gold, if two out of three key macro factors remain supportive, it would likely push the gold price higher.
Despite the bullish scenario for gold, Watling acknowledges potential risks such as a credit crunch similar to 2008. However, he believes this is a low-risk event for long gold positions as the central bank demonstrated its willingness to provide liquidity during the March banking crisis. Other risks include dollar strength, although history shows that gold rallied in 2001 despite periods of dollar strength. Overall, gold continues to hold its morning gains, currently trading at $1915.44.
In summary, Watling’s analysis highlights the lack of correlation between central bank purchases and the gold price. Instead, he emphasizes the importance of TIPS, interest rate expectations, and the performance of the U.S. dollar. Despite potential risks, such as a credit crunch or dollar strength, Watling believes gold is an attractive long opportunity and the case for gold to resume its rally is growing.