Liam Denning is a Bloomberg Gadfly columnist covering energy, mining and commodities. He previously was the editor of the Wall Street Journal's "Heard on the Street" column. Before that, he wrote for the Financial Times' Lex column. He has also worked as an investment banker and consultant.

Gold has rallied because:

  1. Janet Yellen is freaking out a little.
  2. Everyone else is freaking out a lot.
  3. It's almost Valentine's Day.
  4. Two black holes merged, proving Einstein was right roughly 1.3 billion years before the genius was even born.

Spoiler: Reason no. 4, while a cool story, is largely spurious, its inclusion intended to show only that definitive explanations of gold's movements are a bit like gravitational waves: You know they exist, but they are fiendishly hard to pin down.

The Precious
Spot gold price
Source: Bloomberg

Defy your romantic instincts and you might think reason no. 3 is also mere flippancy. But it actually reflects this trend in several recent years:

New Year Cheer
Apart from in 2013, gold has enjoyed a brief rally at the start of each year since its peak in 2011
Source: Bloomberg
Note: Gold price indexed to 100 at the start of each year

As you can see, the bear market in gold since late 2011 has been punctuated by four new-year rallies, including this year's. And while this one has scaled heights not seen in the others, it is by one measure not even the sharpest -- at least not yet. Annualized, a 17.5 percent return over the 29 trading days through Thursday is a whopping 357 percent. But last year's 10 percent rally in a mere 16 days still pips it:

If Only
Annualized returns for the new year gold rallies show last year's was sharper--so far, anyway
Source: Bloomberg
Note: 2016 data through Feb. 11th

At risk of falling into a black hole, the similarity in the sharpness of this year's rally with last year's suggests at least one commonality: a head-fake on Fed policy. While the relationship between gold's price and interest-rate expectations isn't necessarily tight when observed over long periods, it makes sense that they do interact, as gold yields nothing. And there have been clear instances of them moving in opposite directions -- most notably gold's collapse as part of 2013's "taper tantrum."

Which makes this chart pertinent:

Probable Cause
Probability of the Federal Reserve raising rates at upcoming meetings, as implied by Fed Funds futures
Source: Bloomberg

There was near certainty at the start of the year that the Fed would raise rates several times in 2016 and it is now all but gone. Something similar happened a year ago:

Look Familiar?
Expectations of Fed rate hikes also shifted sharply in early 2015
Source: Bloomberg

These charts look the same, but are also different in one crucial respect: This year's swing in rate expectations has been much more extreme. This is echoed in other corners of the financial markets. During gold's initial rally in 2015, for example, the S&P 500 was flat. This year, gold's rally through Thursday coincided with a drop of more than 10 percent in stocks.

The likeliest explanation for the gold rally, therefore, is actually the most straightforward one spelled out in reasons 1 and 2 above: fear. Just as the sustained drop in other commodities has signaled a warning on global economic growth for months, with stock markets catching up recently, gold is doing the same by moving in the other direction. Money seeking a safe haven has flowed into gold, as can be seen here:

Ounces of Prevention
Non-commercial length in Comex gold futures and options is rising again, as it did at the start of 2015
Source: Bloomberg

Since 2011, though, gold hasn't offered much of a safe haven, and the periodic rallies have been momentary diversions on the road downhill. Will this one be any different?

Certainly, the wider collapse in sentiment, including the sharp drop in financial stocks -- by far the worst sector in the S&P 500 this year -- suggests not merely anxiety about recession, but also about whether central banks have exhausted their stores of ammunition. Oil's free-fall, along with China's struggles, raise the prospect of sovereign defaults among commodity-producing countries. As the old saying goes, it isn't paranoia if the world really is out to get you.

Two things should give gold bulls pause, though.

One concerns who is buying gold. The latest report from the World Gold Council shows that, since late 2015, the most enthusiastic buyers have been investors and central banks -- the most volatile sources of demand. While demand overall increased by 4 percent in the fourth quarter, year over year, in the jewelry and technology sectors -- two thirds of the market -- it actually fell.

In addition, half of gold demand is accounted for by consumers in India, China and the Middle East. Recession fears might buoy demand for gold as an economic hedge, but don't forget those fears center mostly on commodity producers and the developed world, which could easily undercut jewelry sales there.

Global gold demand
Source: World Gold Council

The second swing factor is the Fed itself. If the extreme shift in expectations about interest rates has boosted gold in recent weeks, the very extremity of that shift poses a risk. The market has gone from near certainty of several rate hikes this year to near certainty of none in a matter of weeks. Few things are more risky than volatile conviction.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Liam Denning in San Francisco at

To contact the editor responsible for this story:
Mark Gongloff at