Excell with Options: Mining Economic Drivers for the Next Move in Gold Prices

With Gold contracts setting new highs seemingly every day, the product is drawing attention from outside the typical crowd of gold bugs and trend-followers. It is not surprising to see discussions on social media about the beneficial effects of gold as an inflation hedge, central bank debasement hedge or geopolitical risk hedge. With all of those issues having attracted market attention in the last year or so, combined with the steady advance of gold, the correlation makes sense. However, is there causation? Traders may know that gold prices are essentially a reflection of investor sentiment on risk, inflation and global economic stability, but what in particular matters more? I thought I would test a number of theories for what moves gold, such as inflation, central banks, dollar, supply and demand, ETF flows, real interest rates, economic or geopolitical risk, and trend-following. If I look at each of these events one-by-one, will a pattern emerge that may set up a trade this week? Let’s find out.

The first event I wanted to consider is inflation. What is the right measure to consider? Just in the U.S. we could take CPI, PPI or PCE among other things. What about other countries? Also, are those measures backward looking? Should one consider other measures such as inflation expectations? Many good questions, but I decided that markets move on the margin, so I would look at the Citi inflation surprise indices both global and for the U.S. alone. With the global measure (white) and the U.S. (blue), you can see the pattern is remarkably similar for each. I compare these surprise indices to the price of gold (orange). I do see a correlation between these lines through 2022; however, since early 2023, inflation surprises have continued to move to the downside while gold has marched higher. Thus, it would seem to me that the driver for gold over the last 18 to 21 months has not been inflation surprising investors and traders to the upside.