Gold buyers are holding the precious metal as prices break records - and are ready to buy more

By Myra P. Saefong

Rally in face of rising Treasury yields stokes worries over potential market bubble

Under the basic rules of economics, the cure for high prices is high prices. With that in mind, gold could soon put that idea to the test, with futures prices marking record-high settlements 15 times so far this year.

There are signs, however, that retail gold investors are starting to shy away from profit-taking, even as prices climb to fresh all-time highs. And gold's ability to so far defy negative fundamental factors, including rising Treasury yields, is fanning fears of a possible market bubble.

Peter Laframboise, a 77-year-old gold investor based in Ohio, is undeterred. "Put some money to work with some cash set aside to buy more [gold] on any real pullback," he said, in an interview.

As a former stockbroker for Robert W. Baird & Co. and other companies, he said he took pride in understanding the financial markets - and he believes that gold at record highs has not yet caught on with "average" investors.

"The average investor isn't even close to putting gold on their radar screen," and is instead focused on the stock market, said Laframboise. "Just a small percentage of money moving from traditional investments to precious metals could cause a huge surge in value."

Bubble trouble?

Gold's record run comes despite a backup in Treasury yields. The gap between gold prices and U.S. interest-rate expectations, usually a key market driver, has widened since early March, said Thu Lan Nguyen, head of commodity research at Commerzbank, in a Tuesday note.

Nguyen said the gold market's behavior has the characteristics of a "rational bubble." Such a phenomenon reflects the fact that asset prices are often driven by expectations of future price changes, Nguyen explained. "So if you expect the price to go up - not necessarily because you think it is justified, but because you think everyone else is betting on it - it may still be rational to buy the asset in order to share in the gains."

Nguyen said it's difficult to imagine the divergence between the gold price and fundamental market drivers can continue indefinitely. "This does not necessarily mean that a price correction is imminent. But at the very least, a sustained divergence is looking increasingly unlikely," she said.

Read: Gold's record rally has characteristics of a 'rational bubble': Commerzbank

Fueling the rally

While gold's rally has defied the recent rise in Treasury yields, analysts have pointed to other fundamental drivers of the rally, including continued expectations the Federal Reserve and other major central banks will begin cutting interest rates later this year.

Demand from central banks, particularly the People's Bank of China, looking to reduce their dollar holdings has also been cited as a factor in the rally.

Read: Gold hits another all-time high as investors take cues from near-record buying by central banks

Annual gold demand among central banks has been at more than 1,000 metric tons for the last two years, according to the World Gold Council.

Rising tensions in the Middle East and elsewhere have also underlined gold's role as a haven asset, analysts said.

That's come amid an overall rise in gold prices. June gold futures (GC00) (GCM24) settled Tuesday at a record $2,362.40 an ounce. That was the 15th all-time settlement high for prices this year, based on the most-active contracts, according to Dow Jones Market Data. So far in 2024, gold has gained 14%.

Buyers vs. sellers

Gold's rise to all-time highs this year has put off some investors.

In March, the number of private investors buying gold on BullionVault, an online bullion market, fell by 3.4% to the fewest since December, while the number of sellers rose 95.1%.

BullionVault's Gold Investor index, which offers a measure of trading decisions among the world's largest single pool of private investors in physical bullion, fell to a new record low of 47.5 in March, down 4.0 points from February - its steepest drop since July 2016.

The index would read 50.0 if the number of buyers equaled the number of sellers across the month, so a reading of below 50 indicates more sellers than buyers.

So far this month, however, profit-taking has slowed despite gold's rise to fresh all-time price highs, said Adrian Ash, director of research at BullionVault. Gold futures have climbed 5.5% so far in April, after gaining 8.9% in March.

Ash said BullionVault customers have cut their total gold holdings 0.3% by weight over the past week, compared with a 0.5% weekly liquidation during March's investor selling, with the Gold Investor Index rising back above 50.0 from March's record low.

The first seven days of April have brought the "most new first-time users to BullionVault in the first week of any month since October 2022," he said.

Back in October 2022, gold prices had fallen hard to "test the cheapest since the start of the pandemic in March 2020," which could, "perhaps, be a straw in the wind for Western retail investors buying into gold's big uptrend, alongside emerging-market consumers and central banks as well as leveraged speculators in Comex futures and options," Ash said. Almost 9 in 10 BullionVault users live in Western Europe or North America.

Gold investing

For Laframboise, however, his interest in gold investing started in the year 2000 when he bought his first physical gold - 100 coins - at a purchase price of around $300 an ounce.

In the more than two decades since, he told MarketWatch that he hasn't sold any of the physical gold he has purchased. He said he has a "very heavy" weighting of gold in his investment portfolio, with at least 50% in gold, including physical bullion, mining stocks. He also has positions in the Sprott Physical Gold and Silver Trust CEF, a closed-end trust that invests in physical gold and silver bullion, and the VanEck Gold Miners exchange-traded fund GDX.

When asked why he hasn't taken any profits on his physical gold holdings, Laframboise cited a longstanding fear of many gold bulls - worries about the stability of the U.S. dollar.

"I don't anticipate ever selling physical [gold] until we come up with some sort of stable currency," said Laframboise. "I see physical gold as a stable currency - without question."

-Myra P. Saefong

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04-10-24 1331ET

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