Upside momentum from geopolitics and ETF flows
In their January report, analysts from the World Gold Council (WGC) noted that the precious metal had not only increased by 8% against the US dollar. “Record highs were recorded across the board in major currencies.”
Most factors contributed positively, including geopolitical risks, according to the WGC. In addition, gold ETFs also had a good January, with inflows mainly focused on Europe, although not yet spreading to the US.
“Global gold ETFs recorded a $2.6 billion (30 tonnes) increase in assets under management (AUM), almost entirely driven by strong inflows into European gold ETFs (+$3.4 billion, 39 tonnes) – likely supported by the European Central Bank’s (ECB) rate cut, which sent German government bond yields sharply lower during the month.
“US funds fell by $500 million (6 tonnes), Asia by $320 million (4 tonnes), while other funds with small inflows totaled $51 million (1 tonnes),” the WGC said.
In addition, the net long position of investment funds on the COMEX floor also increased by 64 billion USD, equivalent to 150 tons, thanks to strong buying pressure and a slight decrease in short selling.
The only factor putting pressure was the lagging effect from the strong USD rally in December.
However, this does not mean that Asia is losing its position in the gold market. On the contrary, gold demand in China remained very strong during the Lunar New Year, despite prices reaching record highs.
Germany and policy changes could impact gold prices
While the global gold market has been affected by disruptions caused by US President Donald Trump's tariff policies, the WGC believes that the February 23 election in Germany could have a significant impact.
“Polls show that the issue that German voters care most about is economic growth. This means that any government that comes to power will have to deliver on its growth commitments,” the WGC said.
Analysts point out that the German stock market (DAX) has outperformed most major indices over the past two months, reflecting expectations of a favorable policy shift. But more important are German government bond yields.
“Although the ECB is likely to maintain its accommodative monetary policy, stimulus measures could steepen the yield curve, putting upward pressure on longer-term yields and narrowing the spread between German government bonds and US Treasuries, which often drives the USD index,” the WGC said.
Euro strength could weaken USD, support gold
The strengthening euro could put further pressure on the already overvalued US dollar. While this impact may take time to materialise and may not be dramatic, the WGC believes it is an important factor.
“The Bank of Japan (BoJ) sees domestic demand as meeting its target, and the possibility of another rate hike this year remains on the table. This could create a counter-trend view to market expectations of a weaker US dollar,” the WGC said.
The relationship between gold and the US dollar has been inversely correlated for decades, even stronger than the relationship between gold and bond yields. While this has not been the main driver of gold prices recently, the WGC believes that the falling US dollar could be a slight boost for gold.
In conclusion, the WGC believes that the short-term impact from global currency fluctuations due to President Donald Trump's policies may not be a major factor.
“The German election could be a catalyst for the euro’s appreciation against the dollar, by narrowing the yield spread between US Treasuries and German government bonds. Meanwhile, the possibility of a weakening Japanese yen remains open.
All other factors remaining the same, changes in economic policy from Germany and China could pose a challenge to the USD's "monopoly". This, given the close relationship between gold and the USD, could further strengthen gold's current strength," the WGC said.
