Gold’s Unpredictable Rally Driven by Opaque Buying Dynamics

The recent surge in gold prices has captivated investors, particularly as the traditional dynamics that typically drive the yellow metal are behaving unpredictably. According to Ross Norman, CEO of Metals Daily, this mysterious buying activity suggests that gold is on the precipice of further gains.

Intrigue Surrounding Gold’s Performance

Gold’s long-standing reputation as a store of value and a hedge against inflation has made it an intriguing subject among investors. Norman notes that while the gold market is often viewed as the “sum of all fears,” its behavior in recent months has been anything but conventional. Prices are rising while other economic indicators, such as inflation rates and U.S. dollar strength, typically correlated with gold, suggest otherwise.

Breaking Traditional Correlations

Traditionally, gold prices tend to rise alongside inflation; however, Norman points out that this year has defied that trend. In 2024, as inflation rates in Western nations decline, gold has accelerated in value instead of slowing down.

Furthermore, gold tends to have an inverse relationship with the U.S. dollar; when the dollar strengthens, gold typically weakens. However, in 2024, both assets have risen simultaneously, a phenomenon that contradicts historical norms.

Bond yields, another influencing factor, have also seen gold and U.S. Treasury yields moving in parallel—another relationship that analysts expect to behave differently.

Additionally, the relationship between gold and silver has shifted. Historically, during bullish periods for precious metals, silver outperforms gold. Yet, the current spike in the gold-to-silver ratio indicates that silver is lagging behind, leading Norman to label silver as “the dog that did not bark” during this rally.

Surprising Demand from Asia

Another unusual aspect of this rally is the strength of gold demand from Asia. Typically, Asian markets are known for their sensitivity to price changes, especially concerning jewelry, which operates on thinner margins. Despite gold reaching all-time highs, demand from Asian consumers has remained robust.

Explaining the Rally: Three Theories

Norman proposes three theories to explain the recent surge in gold prices:

1. Changing Correlations

Some analysts speculate that gold is no longer correlated with other assets as previously thought, a claim that Norman finds unlikely due to the logical basis of these correlations.

2. Paradigm Shift in the Market

Another theory suggests a paradigm shift in the gold market, where Western considerations are becoming less relevant. As China rises as both the largest producer and consumer of gold, it may influence market dynamics significantly in favor of Eastern buyers.

3. The Opaque Buyer Theory

The most compelling theory points to the possibility of a large, mysterious buyer whose purchases could be skewing the market. Norman emphasizes the unusual opacity surrounding the buying trend, noting that traditional market data is insufficient to identify this enigmatic force.

The Potential Sources of Buying

Norman suggests two potential sources for the significant price increase in gold over the last year:

1. The Derivatives Market

A considerable volume of leveraged long positions has likely been taken on the Shanghai Futures Exchange and in the Over-The-Counter (OTC) markets. Speculative purchases in the derivatives market can create a feedback loop wherein large buys prompt further price increases and demand.

2. Central Bank Activity

In the wake of global financial sanctions and a historical precedent for ‘weaponizing the dollar,’ Central Banks might be offloading dollar assets in favor of gold. Given the lack of minimum counterparty risks associated with gold, these entities could prioritize acquisition over price.

Looking Ahead: Consolidation on the Horizon

As gold’s rally shows signs of momentum waning, a period of consolidation appears to be necessary. Norman foresees this consolidation as beneficial, allowing the market to recalibrate and set a more ‘fair value’ for gold. With prices having reached record highs of $2,955 earlier in February 2025, a period of adjustment may position gold for another robust run.

“The current bull run is intact but consolidation could confer greater strength to future gains,” concludes Norman, indicating that investors should remain cautiously optimistic about what lies ahead for the yellow metal.