According to Daniel Ghali, a senior commodity strategist at TD Securities, last week’s gold price surge was driven by the return of Asia’s so-called “mystery buyers,” with algorithmic trading (algos) amplifying market volatility.
Regarding the true identity of these “mystery buyers,” Ghali clarified that this doesn’t refer to a single individual or institution but rather a group of well-capitalized buyers. This includes last year’s wave of retail gold buying in China and significant gold purchases by Asian institutional investors. Simultaneously, with depreciation pressures on Asian currencies, central banks in the region have also returned to the market in larger volumes for gold buying.
Goldman Sachs analysts Lina Thomas and Daan Struyven recently noted in a report that there has been an unexpected spike in central bank demand for gold. Based on the latest estimates, central banks and institutions purchased 117 tons of gold through the London over-the-counter (OTC) market in November, far exceeding the forecasted 46 tons. Specifically, China’s central bank was the largest buyer, acquiring 50 tons of gold in November, followed by an anonymous central bank purchasing 43 tons of gold through Swiss channels.
Before the U.S. elections, macro funds and discretionary traders had amassed highly optimistic, extreme positions in the gold market. However, the weeks following the election saw a correction in precious metals markets, forcing these investors to liquidate their positions on a large scale.
In contrast to this group, Asian buyers exhibit a different pattern of behavior. A continuous weakening of the U.S. dollar and interest rates would encourage the former group to keep buying. On the other hand, if the U.S. dollar strengthens significantly, it would prompt the return of these so-called “mystery buyers” from Asia. These buyers were one of the key forces behind last year’s strong performance in gold prices.
Traditionally, a stronger dollar and higher U.S. interest rates are considered bearish for gold. However, the current situation is unique — the dollar’s significant appreciation, driven by the Federal Reserve’s policy shifts, has noticeably depreciated Asian currencies. This depreciation has fueled a resurgence in physical gold demand in Asia. Last year, much of the strength in the Asian physical gold market was rooted in currency-hedging needs, which may reemerge in early 2025.
Additionally, algorithmic trading platforms played an amplifying role in gold’s rally last week.
Many may not realize that trend-following algorithms (such as commodity trading advisers, or CTAs) have become the dominant speculative force across commodity markets, including gold. This trend began during the global financial crisis of 2007-2008. The COVID-19 pandemic, in particular, marked the end of a previous commodity bear market and the start of a new bull market. Traditional commodity funds suffered significant losses during the bear market, while algorithmic traders rose to prominence, becoming the leading force in today’s market landscape.
Ghali elaborated that these algorithmic trading funds typically predict future price action based on recent trends. For example, when strong price movement is observed, these algorithms automatically increase long positions. However, algorithmic trading also amplifies selling activity and price volatility.
