APRIL 2025
Demographic trends and technological advancements are reshaping labour markets, meaning the percentage of the working age population either employed or actively seeking work (the participation rate) may soon start trending lower again.
The chart below compares the US labour force participation rate (red line) with the Federal Reserve’s balance sheet (blue line). Significantly, the latter is inverted so declines in the blue line show the Federal Reserve’s balance sheet expanding (and vice versa).
Typically the two lines move in lockstep so a falling labour force participation rate usually triggers an expansion in the Federal Reserve’s balance sheet. This reflects monetary support being deployed (typically via the likes of quantitative easing, or QE) to counter the economic weakness.
An expanding Fed balance sheet also means more money is being printed which, in turn, speaks to fiat currency debasement. This usually brings gold’s status as a monetary hedge to the fore.
Interestingly, gold’s rally to record-breaking levels has unfolded despite the recent decline in the Fed’s balance sheet, but this masks the fact policymakers have been providing persistent “backdoor” liquidity support.
Any future fall in the labour force participation rate will heap pressure on the Federal Reserve to return to a more explicit QE-style program.
This chart highlights the historically strong inverse relationship between the gold price (red line, which is inverted) and U.S. 10-year inflation-adjusted (real) yields (blue line).
Typically, rising real yields hinder the gold price because higher returns on risk-free assets reduce the appeal of non-yielding bullion. However, this relationship has broken down significantly since early 2022.
The turning point coincided with U.S. and EU sanctions being imposed on Russian overseas assets, which enhanced gold’s role as a neutral reserve asset, particularly for Central Banks seeking to diversify away from dollar-based reserves.
Whilst this shift supports gold’s long-term appeal, the recent divergence between real yields and gold prices has reached extreme levels.
Historically, such deviations have tended to mean-revert, either via lower gold prices or declining real yields.
US borrowing costs have been declining in recent weeks but, with bullion racing to a record high above U$3,000/oz, we should rule in the possibility of a near-term correction in the gold price.
The chart below tracks the net positioning of managed money traders in gold futures (blue line) alongside the gold price (red line).
Managed money net exposure is calculated as the difference between the number of long and short contracts held by hedge funds and other institutional traders in the COMEX gold market.
When net positioning reaches elevated levels, it often signals excessive bullish sentiment, making the market vulnerable to a reversal.
Currently, managed money net long positions have surged to levels that, over the past decade, have often preceded meaningful pullbacks in the gold price.
This suggests that speculative positioning is stretched, raising the risk of a correction as traders lock in profits.
This chart illustrates the historical changes in Central Bank gold reserves and highlights a significant decline between the 1970s and the early 2000s, followed by a strong resurgence in recent years.
Since the 2010s, sovereign states have returned as net buyers of gold with factors such as geopolitical unrest and the need for dollar diversification increasing bullion’s appeal as a reserve asset.
Notably, in 2022 monetary authorities collectively purchased over 1,000 metric tonnes of gold; their largest acquisition of bullion since the 1950s.
Central Bank demand has remained strong ever since and should remain so given the prevailing macro backdrop. This suggests international gold reserves could eventually revisit their 1960s high.
This presents a bullish long-term outlook for gold, even if it experiences a meaningful price correction nearer-term.
The content of this communication is for information purposes only. Bentley Reid believes that, at the time of publication, the views expressed and opinions given are correct but cannot guarantee replication of depicted performance. Viewers intending to take action based upon the content of this communication should first consult with the professional who advises them on their financial affairs. Capital invested will be at risk, and you may get back less than you invest. The past is not a reliable indicator of future performance. Neither the publisher nor any of its subsidiaries or connected parties accepts responsibility for any direct or indirect loss suffered by a recipient as a result of any action or inaction, in reliance upon the content of this communication.
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