Here’s What to Watch Next

(Bloomberg) — Gold’s surge to a record this week has baffled many analysts and forced traders to ask themselves just how much further it can go.

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Weak US economic data and banking jitters helped spark a 5% jump in bullion prices over the past four trading sessions, with the latest gains on Tuesday and Wednesday topping the previous high set in December. However, the speed and scale of the move caught many market watchers off guard, particularly in the absence of any significant change in the outlook for when the Federal Reserve would start cutting rates, which has been a key focus.

To be sure, the backdrop looks favorable for gold with geopolitical tensions more fraught than ever. And gold’s performance over the past year has surprised some veteran market watchers well before the current surge, as prices remained at elevated levels despite spiking real interest rates.

Gold typically has an inverse relationship with bond yields, but has been supported by strong central bank buying and demand from consumers in China in particular.

So is gold’s rally a flash in the pan, or is the precious metal just getting started? Here are five key charts to watch:

Real Yields

The biggest driver of the gold price over the past year has been the market’s anticipation of when the Fed will start lowering borrowing costs. Swaps markets show a 65% chance of a cut in June, compared with 58% at the end of February.

On Wednesday, Fed Chair Jerome Powell reiterated to lawmakers that the US central bank is in no rush to cut interest rates until policymakers are convinced they have won their battle over inflation.

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Read More: Powell Reiterates Fed Needs More Confidence on Inflation to Cut

When the Fed eventually pivots, it will lower the opportunity costs of holding gold, which doesn’t bear interest. US real yields have been tracking down since last October, but gold’s recent jump has far outpaced what might have been expected.

Technical Indicators

Gold hit a fresh record of $2,152.25 an ounce on Wednesday. It was trading little changed Thursday at $2,146.10 as of 10:13 a.m. Singapore time.

United Overseas Bank Ltd. sees the next significant resistance price at $2,163, but for Rhona O’Connell, head of market analysis at StoneX Financial Ltd., gold is already overbought above $2,115. The weak US numbers at the end of last week triggered technical and momentum trades, plus a “bandwagon effect,” she said.

Gold Futures Open Interest

The latest Comex data shows money managers added fresh long positions, fueling gains in gold. That rise in open interest implies investors are getting more bullish about gold, rather than just closing out existing short positions.

Chinese Buying

Swiss exports to China — usually a good proxy of Chinese demand for gold — nearly tripled in January, as consumers sought a hedge against turmoil in the country’s stock market and property sector. With the nation’s biggest state-owned lenders slashing deposit rates, putting money in the bank has become relatively less attractive compared with bullion.

In addition, China is among the central banks buying gold to reduce its dependence on the dollar. China has been among the biggest stockpilers of gold in the past year as nations from Poland to Singapore diversify their financial reserves by adding the precious metal.

ETF Disconnect

In contrast to persistent central bank demand for the precious metal, gold-backed exchange-traded funds have cut their holdings for seven consecutive months.

Those ETF holdings are likely to stabilize, according to James Steel, an analyst at HSBC Holdings Plc. That could add further momentum to bullion.

(Adds latest price in ninth paragraph.)

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