The Macro Brief - Gold's rollercoaster ride

0:00Hello from New York, I am Aline Van Dyne and this is the macro brief, the podcast that looks at the key drivers of financial markets around the world. And today we're focusing on a commodity that's been on a roller coaster journey over the past year. I'm talking about gold. Now the story this year has been a real tug of war between the safe haven demand and headwinds from, for example, higher bond yields. But even with these swings, gold remains one of the standout assets of 2026 so far. A big question now is whether this is temporary or part of a more durable repricing of how gold behaves in the financial markets. I know of only one person who can answer these questions. And luckily he is right here in the studio with me.

1:00Jim Steele, our Chief Pressure's Metals analyst and veteran gold watcher. Hi Jim. Hello Aline, thank you for having me. So Jim, a lot's been going on probably more than usual in the gold market in the last 12 months. Tell us a bit more about the market backdrop. Well you're right, this has been the most exciting and eventful 12 months in my entire career. And it doesn't, yes indeed. And that's gone on as you know for decades. And it doesn't show any sign of letting up. I mean this volatility is likely to persist, we think, for some time. And you're correct. We went to an old time high of over 5,400 dollars in February only to pull back quite sharply. Now what motivated the market going up was persistent central bank buying over several years. If you look at it as far as mine production goes in 2022, 23 and 24, almost more than

2:03every three ounces of gold that was mined went into a central bank fold. So when you say central bank buying, they're basically buying it and putting it in their reserves in the same way they would hold dollars or other assets. That is correct. Okay. The European central bank and we issued a special report on this about a gold surpassing what central banks hold treasuries, the value of their treasuries of the US treasuries for the first time ever, at least for the first time in modern finance. And that shows how quickly gold rallied and be how much the central banks were buying. Now they reduced their buying a little bit last year and they're likely to reduce it again this year. But it's still historically high. Now I'd say the other issue was not so much monetary policy but expectations of monetary policy as we got into the end of last year, the beginning of this year. It was expectations for 50, 60 basis points of a Fed cuts. Right.

3:03Exactly. This was going to be the year of rate cuts in the US. That's correct. And that weakened the dollar and lower yields reduces opportunity cost. It also stokes inflation, does all sorts of things to the yield curve and weakens the dollar and that's all good for gold, all of it and the gold market reacted. Now in addition to this, we had good old fashioned FOMO, which is particularly from August of last year, but virtually 12 months ago, we had a lot of new entrants coming into the market under fear of missing out. Their entrance partly explains the severity of the wash out. After the strike on Iran, gold did not act the way most were expecting. It did not go higher with oil. Instead it sold off and they were washed out by and large. Those new entrants and others left the market and liquidated and market fell below 4000.

4:05So let's just unpack that. Basically, very strong gold rally. The economics, the macro backdrop is supportive. Central banks are buying lots of new investors, perhaps smaller investors as well. Retail investors jump onto the bandwagon, think gold has a lot going for it. Then when we do have a true crisis in the markets in the form of geopolitical tensions, gold does not rally in the traditional safe haven way, but instead maybe these investors that are new entrants leave the market, which actually pushes the prices down. So that suggests there's a different driver of the price. That is correct. There's a different dynamic. Now, we focused on oil. That was really why so many in the market were wrong footed. Because historically, there's a positive relationship between oil. I remember the 1970s and the 80s. Gold was positively correlated to oil on the way up in the 70s, on the way down in the

5:0680s. That began to break apart the century when oil becomes a less large percentage of the GDP. Now when oil market shot up again, it fostered increased fears of inflation. It pushed yields higher. That strengthened the dollar at weakened equity markets. And the consequence was heavy liquidation in gold because gold could not stand up against higher yields, screeching yields, screeching dollar, and concerns that yields would go even higher because of inflation when the equity markets dropped. See, a percentage of people who own gold are agnostic to the price. And that's what I think a lot of people don't understand is that they buy it as a safe haven to their equity or their paper portfolio. So when equity is dropped, if you want to maintain your portfolio, if you have some gold and you liquidate gold, that might allow you to do that. And that's what happened. So all of this drag gold down below 4000.

6:09Right. So that was, I guess, the beginning, the first few dips on the roller coaster going up and then down. And then what happened? Where does this leave us on a more even keel or is the market set up for more of these ups and downs? Well, I think it's going to remain volatile, but possibly not as volatile as the last 12 months. Certainly, historically, it's going to be volatile. Right. So as we have, and we've discussed this on a podcast several times, we're in an environment, especially with the new Fed, Chair Kevin Warsh, where there is a bit more uncertainty about the path ahead, both in terms of the policy approach and also, of course, around the economy and inflation. So that uncertainty feeds into uncertainty in the gold market too. That's right. Simply central banks, they're filling the vaults with gold. They don't care what's happening to the price, presumably. Well, they're not as price sensitive as, say, a hedge fund or an individual trader, but

7:12they don't like to give it away either. And they're very astute. And now they have the great advantage of having multi-year strategies when central banks sold gold, they sold for about 20 years straight. So when was that until a few years ago? That's correct until earlier this century. When we, actually, and it was geopolitics that triggered the sales and it's triggered geopolitics, it's triggering the buying. At the end of the cold, many US and European central banks had built up massive gold reserves in the post-war period, because in a war, you don't know whose currency is redeemable, but you can always use gold. So we had massive gold stocks in the bank to France, Bundesbank, Bank to Talia, et cetera, and then a gold war was officially declared over by the first bush in Gorbachev. The first heavy central bank sales occurred just three months afterwards, because central bank, and no one put the two together at the time. Right.

8:13So from the perspective of the reserve managers or the managers at the central bank, say, like, this is a risk we don't need to position for anymore. Cold war. Let's liquidate all this gold precisely. Where did it go? It went on to the market. That's why, and that's why we were in a profound bear market. I remember it vividly. Gold was going down one year after another. The world was getting better. The world was globalizing. Democracy was sweeping across the world. Societies would become more liberal, more capitalist, and geopolitical risks were dropping. For the first time in my lifetime. As a consequence, and gold is a risk thermometer. What it does is it reflects these things more accurately than anything else that I can think of with a possible exception of the dollar. Right. And we went from 91 into something around 2005. Nothing but selling. Nothing but selling. Now in the last few years, the markets have been buying.

9:17And one of the things that Barry Eikengren, who's an excellent gold economist at Berkeley, what he says is that the use of sanctions has reinvigorated central bank demand for gold in case you're in a country that could be put under sanctions. You'd rather have that gold. Now that's in addition to all the other traditional things, which is I have a lot of dollars. I might have more dollars than I want. I want to diversify. I want to protect my other assets, et cetera, et cetera. Really interesting. Now looking at the point you're making about the risk thermometer, gold being a risk thermometer. We've talked about new types of investors coming into the market. And that continues to grow. In fact, we were both on a podcast together when we talked about gold tokenization, which is digital assets, which allow exposure to gold and is also bringing in new potential

10:19buyers. Yes, because you can buy it in much smaller fractions, essentially. How is the risk thermometer? I guess this is related to what we were talking about before. The risk thermometer role and then the broadening of the investor base. Is this a sort of changing dynamic that will continue to determine what happens in the months ahead? Well, I think it allows digital gold, allows the smaller investor, a very small investor, a much greater voice. He can make his thoughts. Borshi. Actually, when it comes to gold, it's likely to be she. India is the, often, the first or second largest consumer of gold in the world. And over 90% of the boyan bought, actually, closer to 95% of the boyan bought in India is bought by one. Now, you throw me right off there, Eileen. But what we've got is the dark organization of gold.

11:19And we saw that with ETFs. So originally, you'd have to buy an equity, you know, goldmine or you'd buy a coin or you would buy a bar. Bar is a pretty expensive. Perhaps you, you know, coins of a very high premium. So that was what the investor was left with. Then we came up with the ETFs. Exchange traded funds, of course. Exchange traded funds. Now that's gone further. Now you can buy much less than an ounce, just a fraction of an ounce. And that allows, and I think, so the demand, I think, will come principally from the lower income countries. And it will bring a lot more players into the gold market. So Jim, we've only got a few months left of this year, which you started off by saying is one of the most exciting in your career. So point to us two or three things that you're particularly looking out for. Well, I think you have to look at the dollar first and foremost. There's a traditional inverse relationship between the two. Now during periods of heightened crisis or risk, both the dollar and gold can move higher

12:19together as it did during COVID or the global financial crisis. But generally speaking, there's an inverse relationship. So if the dollar remains strong, that's a headwind against gold. The other thing too is going to be monetary policy. If we continue to shave our expectations of a rate hike, maybe to neutral, that would be positive for the gold market. But the other thing, I think, looking in the background is fiscal profligacy. Government debt, higher government debt, periods of accelerating government debt, which is across the Western world right now. The United States is not the only violator in this regard, has traditionally been good for gold for a whole range of historical reasons. And yes, of course, issues around the fiscal outlook in the US, where the deficits remain at very high levels, could turn up in the US midterm election. So there's a lot of potential catalyst, I suppose, for some of these issues to get onto the radar more. Jim. Yes, indeed.

13:19Jim, thank you so much. This is fascinating. And look forward to hearing more about what's ahead in a few months time. Thank you, Elaine. Thank you, everybody. So my thanks to Jim Steele. That's all from us here on the macro brief. This episode was hosted by me, a lean Van Dyne, in our New York studio, and produced by Tom Barton. Don't forget to like and follow wherever you get your podcasts. Thanks for listening, and we'll be back again next week.