Currency market table

Gold price in February 3M 1Y 3Y 5Y 10Y 20Y
JPY −0.73% 1.99% 13.48% 45.37% 77.13% 70.32% 502.45%
AUD −0.76% 4.12% 3.25% 11.42% 59.78% 75.36% 372.05%
NOK −1.42% 9.04% 12.78% 27.42% 82.24% 109.40% 657.67%
CHF −2.65% 2.83% −1.66% 12.42% 38.20% 16.29% 263.63%
EUR −2.74% 1.60% 1.50% 20.09% 59.73% 42.66% 432.75%
CAD −2.88% 5.06% 3.02% 17.35% 47.36% 53.06% 380.01%
GBP −3.11% 3.44% 6.70% 22.73% 58.43% 45.59% 582.42%
SEK −5.00% 3.03% 5.63% 25.70% 75.01% 87.17% 543.35%
USD −5.28% 3.23% −4.31% 15.20% 38.55% 15.56% 421.83%

The weakest major currency of the month in February was gold (XAU).

Top news in the markets recently

Key Fed inflation measure rose 0.6% in January, more than expected (CNBC)
German inflation unexpectedly accelerates in February (Reuters)

Trader's comment 3 March 2023

In the previous newsletter released on 7 February, I wrote: '[...] it is likely that gold will find a short-term bottom within the next three weeks, after which we'll probably see another leg higher and new highs.' As of 3 March, gold's correction looks to have bottomed on 28 February—three weeks after making the comment. I have to admit that I didn't expect gold's correction to run quite this long and so I shall iterate my process to become better.

Throughout this correction, gold's volatility (GVZ) has continued to fall from 16.1 to 14.1, which is a positive signal confirming that the move in February was more likely a correction than a shift in trend.

Source: TradingView

For comparison, if we look at US stocks, which also saw a downturn in February after a strong January, we can see that the volatility in US stocks (VIX) has been rising—from 17.1 to 20.3—rather than falling during this downturn. Rising volatility during a correction is a bearish signal for US stocks and in part the result of the increased option activity, which we pointed out in the previous newsletter in February.

Source: TradingView

The same is true for bonds, which have also been falling, whilst at the same time volatility (MOVE) has been rising.

Source: TradingView

The short-term moves across markets continue to align with the negative macroeconomic environment, which continues to favour gold over stocks and bonds. The February correction in gold has served its purpose—flushing out the excessive short-term bullish sentiment. The sentiment in gold has been reset and has turned negative, which will provide the fuel for the next leg up.

Another interesting note is that the amount of gold held by major gold ETFs has been flat since November, which suggests that at least ETF investors have not chased the rally in gold so far, underlining the pessimistic sentiment in gold. Due to human nature, most investors will not be able to buy when the price is falling but rather will chase gold higher once new cycle highs are made and especially once new all-time highs are made.

It's good to keep in mind that institutional liquidity flows away from assets with rising volatility and into assets with falling volatility. These flows drive the intermediate cycles, ranging from weeks to months, in all assets. I continue to think that it is reasonable to expect new all-time highs for gold in all major currencies during the first half of 2023.

What could change my short-term outlook for gold?

  • Gold's volatility would start to rise while the price is flat or decreasing.
  • Gold's price would bounce higher from here and wouldn't reach the January high but instead would make a lower high and a lower low—it remains to be seen whether the final low of the correction was set on 28 February.
  • Economic growth would start to materially improve, followed by stocks making new higher highs, whilst the volatility of stocks starts to make lower lows (i.e. the media's soft landing narrative).
  • The realisation of the liquidity risk discussed in the December market commentary.


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