Hi YXI friends,

I’ve been receiving news alerts everyday for two straight weeks that Gold is making new highs. Even when the broader market (or especially when the broader market) including Crypto sold off hard on tariff news, Gold just kept going as the investor safe haven.

What are the key factors influencing Gold and Silver prices? What does the rest of February have in store?

Today, we examine the real drivers of Gold in the current macro environment, including the imapact of Global Liquidity, US Dollar, China’s PBOC buying, Seasonality, and Correlations with Stocks and Bonds. I also offer the near-term technical analysis for Gold and Silver ETFs, GLD and SLV.

Let’s dive in!

Table of Contents

• 1. Gold And Silver Vs Global Liquidity

• 2. US Dollar vs Gold

• 3. China Keeps Buying Gold…Forever?

• 4. Gold Seasonality: February Weakness

• 5. Gold, Silver, Equities, Bond Yield Correlations

• 6. Technical Analysis For GLD, SLV

DISCLAIMER: This newsletter is strictly educational. Any information or analysis in this note is not an offer to sell or the solicitation of an offer to buy any securities. Nothing in this note is intended to be investment advice and nor should it be relied upon to make investment decisions. Any opinions, analyses, or probabilities expressed in this note are those of the author as of the note's date of publication and are subject to change without notice.

1. Gold And Silver Vs Global Liquidity

GLD (SPDR Gold Trust ETF) vs G5 M2 Money Supply in USD, 4-week lag

Global liquidity is a major driver of non-yielding asset prices such as Gold, Silver, and Bitcoin. We use the G5 M2 Money Supply (US, China, EU, Japan, UK), denominated to USD, to approximate the changing levels in Global Liquidity.

We observe that into the New Year, there had been a 3-4 week lag between the moves in the G5 M2 and Gold. This meant Gold was moving in the same direction as the G5 M2 (in USD) 4 weeks behind. As the G5 M2 peaked at the end of September, we saw Gold price tumble in November, followed by some short-lived bounces in December.

The G5 M2 levels are denominated in USD and therefore greatly influenced by the strength of the US Dollar. A strong USD means headwinds for Global Liquidity. 

Why?

Many governments and global corporations borrow in USD as it’s the world’s reserve currency. A stronger USD increases the cost of servicing existing USD-denominated debt in their local currencies.

USD strength also makes dollar-based lending more expensive, limiting the borrowers’ ability to access credit. Moreover, it reduces the value of collateral from foreign currency bonds, which negatively impacts the funding conditions.

Finally, Gold and Silver are primarily quoted in US Dollars. A rise in USD naturally weakens their prices.

In December, the falling G5 M2 in USD had created an expectation that Gold could continue to underperform into the New Year. Fortunately, G5 M2 only consolidated sideways in December and January. This provided a more benign context for Gold to reattempt the all time high.

SLV (Silver Trust ETF) vs G5 M2 Money Supply in USD, 4-week lag

Silver is heavily correlated with Gold (see section 5), but has yet to make a new all time high like Gold has.

The key difference between Gold and Silver, apart from market capitalisation, is the Central Bank interests. Since the early 20th Century, Gold has won out as the global choice of Hard Money ahead of Silver. Global Central Banks hold Gold as part of their reserves, but rarely silver.

Today, Silver behaves as half precious metal that is ranked just below Gold, but also half commodity, as it is produced as a by product of lead and copper.

Silver vs Copper Prices

One would observe that instead of going up and right forever, Silver experiences commodity cycles like Copper.

2. US Dollar vs Gold

DXY vs GLD (https://www.tradingview.com/x/YAvaUA0n/)

Remember that I just said a strong USD weakens Gold pricing - why has Gold been rising relentlessly despite the USD staying strong?

If we look at the DXY (US Dollar Index) vs. GLD (Gold Trust ETF), we see that most of the time, DXY (in green) and GLD (yellow) share an inverse directional relationship. But this relationship is not always true.

The last time when DXY and GLD rose simultaneously together was in 2018 - right after Trump started the first Trade War with China. I highlighted this period inside the rectangle on the chart.

Gold initially dipped due to the strong US Dollar in the first half of the year, but markets became fearful of slower global economic growth and supply chain disruptions as the trade war began. Investors started buying Gold as a safe haven asset and a hedge against the global slowdown risk and market volatility.

Today, we have Trump back in the White House, with tariffs being announced or implemented every other day. The recent surge in Gold price reflects a similar investor anxiety as the 2018 Trade War.

Then there is the Emerging Market central banks and governments buying, including China, Russia, Brazil, India, and Turkey. I will focus more on China below, as they are the biggest buyers right now.

3. China Keeps Buying Gold…Forever?

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