Gold prices are flat on Friday morning. The price of gold is trading at $2666.44, down $5.97. The August personal income and outlays report, including the Federal Reserve’s preferred inflation indexes, has been released. The PCE price index rose 2.2% year-on-year, lower than expected and down from July’s 2.5%, while the core PCE increased 2.7% annually, in line with expectations but slightly up from July’s 2.6%, with markets showing little reaction to these figures. The price of silver is trading at $32.16, up 14 cents.
The gold market is experiencing a peculiar bull run, reaching an all-time high despite minimal participation from traditional physical buyers. This rally is primarily driven by derivatives trading, with Chinese speculators leading the charge through massive purchases of futures, options, and forwards. The market’s disconnect from typical drivers like inflation, dollar strength, and treasury yields suggests that derivatives positions are largely agnostic to market signals. US speculators have also joined the rally late, with futures longs reaching a near 4-year high. As Ross Norman points out, “Buy enough gold calls though and gold will rise on the delta hedging … and then do it so big … that a rally becomes a self-fulfilling prophecy”.
Physical gold demand has significantly declined across major markets. Indian demand has decreased following a duty cut rally, while Chinese and Hong Kong jewelry groups report a substantial drop in trade. European markets, particularly Germany, are experiencing worryingly thin physical trade. Only the UK shows some strength in physical demand due to economic concerns. Despite these fundamentals suggesting the market is above fair value, the derivatives-driven nature of the rally may push gold prices even higher, potentially reaching $3000 before year-end.
