Theme and Background
This chapter focuses on the strong rebound in the precious metals market in November 2022. The report points out that, catalyzed by signals of a slowdown in the Federal Reserve's rate hikes, better-than-expected October CPI inflation data, and the possibility of China exiting its zero-COVID policy, the precious metals sector became the best-performing asset class for the month, with gold, silver, and related stocks all recording significant gains.
Core Thesis
The author's core investment argument is that key macro headwinds for the precious metals market have peaked, including the Federal Reserve's hawkish stance, the U.S. dollar index, and bond yields, all of which have reached momentum peaks, creating favorable turning conditions for gold and silver. The counterintuitive judgment is that, although ETF gold and silver holdings are still declining (down 0.86% and 0.41%, respectively), physical purchases by China, India, and central banks have far exceeded investment outflows and systematic trading flows, indicating a fundamental shift in market structure.
Key Arguments and Data
- Gold Performance: Rose by $134.96 (+8.26%) to $1,768.52 in November, the largest monthly gain since July 2020. Year-to-date, it is still down 3.32%.
- Silver Performance: Rose by $3.03 (+15.81%) to $22.19, continuing to outperform gold.
- Gold Equities: The SOLGMCFT Index rose 16.79%, and GDX rose 20.24%, both the largest monthly gains since April 2020.
- U.S. Dollar Index: Fell 5.00% to 105.95, with the year-over-year change reaching the typical top threshold of +20% (observed multiple times after the 1985 Plaza Accord).
- Real Yields: The 10-year U.S. Treasury real yield fell 30 basis points to 1.24%, peaking at the 1.60% resistance level.
- CFTC Positioning: Gold non-commercial long positions hit a -2 standard deviation regression from the 10-year range in September/October, while short positions reached the 96th percentile, with extreme bearish positioning triggering a rapid short squeeze.
- Historical Comparison: In a similar situation in 2016, the U.S. dollar eventually hit new highs, but gold held its lows and subsequently rose.
Comparative Data Table:
| Indicator |
November 30, 2022 |
October 31, 2022 |
Monthly Change |
Monthly % Change |
Year-to-Date % Change |
| Gold Spot |
$1,768.52 |
$1,633.56 |
$134.96 |
+8.26% |
-3.32% |
| Silver Spot |
$22.19 |
$19.16 |
$3.03 |
+15.81% |
-4.78% |
| Gold Senior Equities Index |
113.04 |
96.79 |
16.25 |
+16.79% |
-8.37% |
| GDX |
$29.05 |
$24.16 |
$4.89 |
+20.24% |
-9.30% |
| U.S. Dollar Index |
105.95 |
111.53 |
-5.58 |
-5.00% |
+10.75% |
| 10-Year U.S. Treasury Yield |
3.61% |
4.05% |
-44 BPS |
- |
210 BPS |
| 10-Year Real Yield |
1.24% |
1.53% |
-30 BPS |
- |
234 BPS |
| Gold ETF Holdings (Tons) |
94.28 |
95.10 |
-0.82 |
-0.86% |
-3.64% |
| Silver ETF Holdings (Tons) |
761.64 |
764.76 |
-3.12 |
-0.41% |
-14.04% |
Companies/Assets Involved
- Gold Bullion: Core asset, bullish. The report argues that its 50-week moving average is trading in a narrow $60 range, and extreme CFTC positioning suggests a bottom has formed.
- Silver Bullion: Bullish. Continues to outperform gold, but ETF holdings lag behind CFTC futures market activity.
- Gold Senior Equities Index (SOLGMCFT Index): Bullish. Rose 16.79% in November, highly correlated with gold spot.
- GDX (Gold Equities ETF): Bullish. Rose 20.24%, outperforming gold spot.
- U.S. Dollar Index (DXY): Bearish. Momentum has peaked, CFTC net long positions remain high ("trapped longs"), and the year-over-year change has reached a historical top threshold.
- 10-Year U.S. Treasury Yield/Real Yield: Bearish. Technicals indicate a cyclical top, with real yields peaking at the 1.60% resistance level.
Investment Implications
- Go Long Gold and Silver: The peaking momentum of the U.S. dollar and real yields is the core catalyst. Extreme CFTC short positioning has triggered a short squeeze, and historical patterns (e.g., 2016) suggest gold may hold its lows and move higher.
- Focus on Gold Equities: GDX and the SOLGMCFT Index outperformed gold spot in November, indicating that mining stocks have higher elasticity during macro turning points.
- Beware of Dollar Rebound Risk: The report notes that the U.S. dollar may move in a "zigzag" upward pattern, but momentum has peaked, and the drivers of systematic investment flows have changed. If the U.S. economy shows unexpected resilience in 2023, the dollar and gold could rise together (systematic risk hedging).
- Lagging ETF Holdings as a Potential Catalyst: Gold and silver ETF holdings are still declining. If subsequent fund inflows resume, this will provide additional upward momentum.
Theme and Background
This chapter explores why gold’s price performance in 2022 was “not good enough” and how future macro-environment changes may impact gold investment. The author argues that although gold outperformed other assets in 2022, its gains fell short of market expectations due to aggressive Fed rate hikes, a surging US dollar, and systemic capital outflows. However, strong purchases by long-term buyers (China, India, and central banks) are reshaping supply-demand dynamics, while rising macro volatility and potential recession could provide new upward momentum for gold.
Core Thesis
The author’s central argument is: Gold’s “weakness” in 2022 is temporary; long-term structural buying (especially by central banks) is accelerating, and the macro environment is shifting from an “inflation cycle” to “high volatility + recession risk,” which will drive gold’s strong performance in 2023 and beyond. Counterintuitive judgments include:
- Gold failed to hedge inflation like in the 1970s because the current US dollar strength (DXY up 10.75% in 2022) contrasts sharply with the dollar’s 29% decline in the 1970s, and the market structure is different.
- Systemic capital (e.g., CTAs) dominates short-term prices, but long-term buyers (China, India, central banks) have already far exceeded investment outflows. Once systemic capital turns net buyers, gold prices could jump (similar to 2019).
- The peak of Fed rate hikes and the dollar surge may have passed. 2023 will bring recession and financial instability, which instead benefits gold as a safe-haven asset.
Key Arguments and Data
1. Reasons for Gold’s “Lagging” Performance in 2022:
- Gold fell over 11% from its 2022 low but still outperformed other assets. Reasons include: generally low risk exposure in funds (low beta, high cash), Fed quantitative tightening (QT) causing capital outflows, and the US Dollar Index (DXY) rising 10.75% in 2022 (compared to a 29% decline in the 1970s).
- The drivers of gold’s rise in the 1970s were not just inflation but also the collapse of Bretton Woods, the Vietnam War, Middle East wars, the Iranian Revolution, loose monetary policy, etc. The current environment is different.
2. Rising Macro Volatility:
- The New York Fed’s inflation uncertainty index (Figure 4) shows an upward trend, indicating market disagreement over the nature of inflation (cyclical, structural, or random), which will lead to high macro volatility.
3. Accelerated Buying by Long-Term Buyers:
- Total gold purchases by China, India, and central banks over the past 12 months far exceed investment outflows and systemic trading flows (Figure 5). A similar situation in 2018 was followed by a sharp gold price rally in 2019.
- Central bank quarterly purchases (as of September) reached 399 tonnes, nearly three times the previous peak (about 136 tonnes per quarter) (Figure 6). Global annual gold mine production is about 3,200 tonnes, so central bank purchases now account for a significantly larger share.
- Central bank buying motives: gold as “external money” (not anyone’s liability) and the warning effect of Russia’s $630 billion foreign exchange reserves being frozen.
4. Recession and Financial Instability Risks:
- The lagged effect of Fed rate hikes (9–18 months) will materialize in 2023, with terminal rate expectations at +5%, making recession hard to avoid.
- Both the 10-year–3-month and 10-year–2-year US Treasury yield curves are inverted, at their most extreme levels since the 1980s (Figure 7), historically a reliable recession signal.
- The market is transitioning from the QE-ZIRP (zero interest rate) era to a “higher for longer” rate, QT, and deleveraging environment, testing financial system stability.
Companies/Assets Involved
- Gold (Spot/Futures): The author is bullish. The core logic is that long-term buyers (central banks, China, India) have already surpassed investment outflows; once systemic capital turns, gold prices will jump.
- US Dollar Index (DXY): The author believes the dollar’s peak has passed. Its 10.75% rise in 2022 was a headwind for gold, but it may weaken going forward.
- US Treasury Yield Curve: The inversion is the most extreme since the 1980s, signaling recession risk.
- Central Banks: As “price-insensitive” long-term buyers, quarterly purchases surged from 136 tonnes to 399 tonnes, driven by reserve diversification and geopolitical risks (Russia’s frozen reserves).
Investment Implications
- Go Long Gold: Current gold prices are suppressed by systemic capital, but long-term buyers are accumulating. Once systemic capital turns net buyers (as in 2019), gold prices could rise rapidly. It is recommended to increase gold allocation as recession expectations heat up in 2023.
- Monitor Central Bank Buying Dynamics: Central bank purchases are a key support for gold prices, especially amid geopolitical tensions (e.g., Russia’s frozen reserves), which may prompt more central banks to increase gold holdings.
- Beware of Financial Instability Risks: The lagged effect of Fed rate hikes and yield curve inversion suggest a recession or financial event could occur in 2023, benefiting gold as a safe-haven asset. It is recommended to reduce exposure to risk assets and increase gold allocation.