Gold prices continue to outperform in the first few days of March, finding renewed support close to its one-year high of $1,250/oz Thursday, despite improved global risk appetite, finding momentum even as the dollar strengthens and a US interest rate hike is back on the cards.
Gold has gained almost 20% this year largely on safe haven demand amid market uncertainty at the start of 2016, but as markets start to find solid ground -- global equities holding eight-week highs Thursday -- increased risk appetite is not denting gold's appeal.
Whilst a strong dollar and increased likeliness of further rate hikes in the US, for so long negative drivers of the gold price, appear to have a limited impact.
"Despite this adjustment in expectations, gold prices have stabilized. Last year this would have been unthinkable," said ABN Amro's Georgette Boule in a research note Thursday.
A recovery in oil prices has coincided with renewed optimism over the health of the US economy this week, boosted by better than expected data on growth and inflation, which has pushed the dollar to one-month highs this week, the US dollar index up 3% against a basket of currencies since the beginning of February.
According to CME Fed Fund Futures Thursday, the likeliness of a rate hike by June is now over 30%, up from under 5% a month earlier, while the probability of a hike by the end of the year is over 40%, up from 6% in February.
"Gold priced in US dollars is at relatively attractive levels compared to other safe-haven assets and has more upside potential in an environment of low or negative (real) yields," Boule said, highlighting the advantage gold has compared to US Treasuries, another safe-haven asset.
Higher interest rates increase the opportunity cost of holding gold as a non-yielding asset.
Meanwhile most market observers point to the strength of investment demand, which has increased considerably in 2016, following large withdrawals in the past two years.
Inflows into SPDR Gold Trust, the world's largest gold-backed exchange-traded product, totaled 29.44 mt for the week ending Friday, the largest weekly inflow since 2011 according to data released by the company.
February additions into the fund, which represents nearly half the volume of gold-backed ETFs globally, total 93.17 mt as of Friday, larger than all of 2015's outflows.
While speculative investors continue to extend bullish positions, as seen by the increase in net long COMEX contracts, currently at an 18-week high.
According to data from the US Commodity Futures Trading Commission Monday, net long positions have extended every week this year.
However, scarce physical demand could yet ruin the party.
A three-day strike called by jewelers in India Wednesday on tax increases announced by the government this week, has effectively closed the physical bullion markets in the country, which has already been struggling with demand on high prices.
As the world's second-largest consumer of gold after China, any prolonged strike action could put the brakes on gold's rally this year.
Discounts paid for physical gold have been heard as high as $40/oz to the international price in India for much of February, while negative premiums have been reported in all the major gold centers of Istanbul, Hong Kong and Shanghai.
