Latest / The Commodities Economy with Fexingo: Oil, Gold, Wheat, and Raw Material Markets / Gold at 4500 What the Rally Means Now
Transcript
- Lucas: Gold just touched 4,511 an ounce — that's the futures price as of this afternoon, May 22nd. And the move over the past five days is essentially flat, down less than one percent. But when you zoom out, this is a metal that has gained nearly 30 percent over the past twelve months. So the question I keep hearing from listeners is: is this a bubble, or is this the new normal? Luna: And I think a lot of people are looking at the headlines — 'gold at all-time highs' — and assuming it's just another inflation hedge story. But I suspect it's more complicated than that. Lucas: Way more complicated. Because the standard narrative — gold goes up when inflation is high — actually broke down in 2022. Inflation was running hot, CPI was above 8 percent, and gold was basically flat. The real driver this time is something else: real yields. The ten-year Treasury yield, minus expected inflation, has been falling for months. Right now, the ten-year breakeven inflation rate is at 2.39 percent, down from 2.44 just a week ago. That means real yields are actually declining, even though nominal yields haven't moved much. Luna: Right — lower real yields make gold more attractive because the opportunity cost of holding a non-yielding asset goes down. So this rally is actually quite textbook in that sense. Lucas: Exactly. And there's a second factor that's even more structural: central bank buying. The People's Bank of China has been adding gold to its reserves for eighteen consecutive months now. We're seeing similar moves from central banks in Poland, India, and Turkey. The World Gold Council estimates that central banks bought over a thousand tonnes of gold in 2024, and the pace hasn't slowed in 2025. This isn't speculative money — this is official-sector demand. Luna: So the argument is that there's a floor under gold because these buyers are price-insensitive in a way that hedge funds aren't. But what about the speculative side? I've seen the CFTC commitment of traders data, and it shows hedge funds are extremely long. Lucas: They are. Managed money net long positions in gold futures are near the highest levels since the pandemic. That does create a crowding risk — if everyone decides to exit at once, you could get a sharp sell-off. But here's the thing: the positioning has been elevated for months, and gold has just kept grinding higher. So it's not a contrarian sell signal by itself. Luna: But let's talk about the dollar. Usually gold goes down when the dollar goes up. And the dollar has been fairly strong this year — the DXY is around 104. So why hasn't that correlation held? Lucas: It's a great point, and it's the piece of this rally that most people miss. The traditional inverse correlation between gold and the dollar has weakened significantly. I think part of the reason is that the dollar strength we're seeing is driven by safe-haven flows — geopolitical uncertainty, trade tensions — and gold benefits from the same safe-haven demand. So both assets can rally simultaneously when fear is the dominant motive. Luna: That makes sense. And it also explains why copper has been ripping higher too — copper futures at 6.39, up nearly 2 percent in five days — but for totally different reasons. Copper is all about industrial demand, the energy transition, supply constraints. Lucas: Right. Copper's story is about electrification and chronic underinvestment in new mines. Gold's story is about monetary debasement, central bank diversification, and fear. They happen to be moving together right now, but the fundamentals are completely different. If you're building a commodity portfolio, you need to understand that distinction. Luna: So what's the bear case for gold here? Because at 4,500, it's not cheap by any historical measure. Lucas: The bear case is that inflation expectations continue to fall. If the ten-year breakeven drops below 2 percent, that would mean the market expects inflation to be well under control. Gold would lose its narrative. And if real yields start rising again because the Fed signals tighter policy, that's a direct headwind. Also, there's the possibility that central bank buying slows down — if China decides it has enough gold and pivots back to Treasuries, that would remove a huge source of demand. Luna: But you don't sound convinced by the bear case. What's your view? Lucas: I think the structural factors are stronger than the cyclical ones. Central banks are diversifying away from dollar reserves for geopolitical reasons that aren't going away. Real yields are likely to stay low if the economy slows. And gold still represents a very small share of most institutional portfolios. I'm not saying buy at 4,500, but I think pullbacks will be bought. The key number to watch is the breakeven inflation rate. If it stays above 2.3, the trend is your friend. Luna: So for someone listening who wants to act on this — is it too late to add gold exposure, or is there still a case? Lucas: I'd say dollar-cost averaging makes sense. Don't go all in at these levels, but if you have a long-term horizon, gold should be part of a diversified portfolio. And I'd look at gold miners too — the XAU index has lagged the metal itself, so there might be catch-up potential. But that's a whole other episode. Luna: We'll save that for next time. For now, the listener's takeaway: gold at 4,500 is supported by real yields and central bank buying, not just hype. Watch the breakeven, watch the dollar, and don't fight the trend. Lucas: Exactly. Thanks, Luna. We'll be back tomorrow with a look at what's happening in the cotton market — it's down over 7 percent in five days, and there's a fascinating supply-demand story behind it.