Gold prices gained 6.1% in January on the back of a weaker U.S. dollar and tumbling U.S. Treasury yields. Other contributors to January's gain included rising COMEX futures net lows, which climbed to 250 tons or 16% of open interest. Meanwhile, gold exchange-traded funds in Europe recorded outflows, although U.S. gold ETFs added to their holdings in January.

However, while the gold price rose steadily higher between early November and late January, it has since reversed course again and now sits at around the level it was at in mid-January. The gold price peaked at $1,924 an ounce in January although it has since entered into a correction, plummeting into the low 1,800 an ounce range. 

So does this mean the latest gold rally is over? One key data point to watch is the U.S. Dollar Index, as the gold price has been inversely correlated with the dollar. However, many other factors have also been impacting the gold price, so some analysts think there could be more upside this year.

Drivers of the gold price in January

According to the World Gold Council, a significant chunk of January's price gain was due to the weaker U.S. dollar, followed by the decline of 37 basis points in the U.S. 10-year Treasury yield. 

The council also pointed to a positive "unexplained" driver of January's gold price action, a factor that also marked some parts of 2022. This "unexplained" driver of the gold price was particularly significant in September, although it also contributed in December and detracted in November.

The World Gold Council said it couldn't rule out the possibility that some of the "unexplained" return in the gold price was the piece that's attracting purchases by central banks or capturing expectations of purchases. In 2022, central bank buying was a major contributor to the gold price.

On the other hand, the council noted that December's strong return for gold served as a small drag on the January price action. Gold tends to see some mean reversion, which reflects the metal's low volatility compared to that of other assets. 

Gold futures also help drive the price

In July 2022, the World Gold Council highlighted the unusual occurrence of net short levels for COMEX gold Managed Money futures, adding that those levels were associated with subsequent strength in the gold price. Since the net short reached a new low in September, the gold price has rallied 15%. 

Unfortunately, the World Gold Council has only recorded four such lows in its data, giving it an exceptionally small sample size to predict from. However, breaking the net longs into constituent longs and shorts and incorporating gold ETF flows indicate the possibility of a sustained rally. 

The council reported that so far, gold's performance has been similar to previous post-low rallies, which it described as "strong and durable." The World Gold Council also reported that these longs have been active, suggesting a buy-in to gold's "good tactical case." 

Further, it discovered that the shorts have not capitulated, which suggests that going long on gold is not a crowded trade yet. The council also observed that ETF outflows in Europe have masked North America's positive flows, and futures have led changes in North American ETFs by up to two weeks.

The result of this analysis is the possibility that rising net longs could drive further inflows at ETFs, prolonging the rally in the gold price. 

Analysis of the previous three gold rallies

In 2022, the World Gold Council focused on the signal value of COMEX futures positioning value on gold prices. It found that rare net short positioning tended to precede strong rallies in the gold price, which is consistent with oversold and under-owned sentiment. 

To address the small sample size of available gold net shorts, the World Gold Council z-scored the series. It also combined those data points with positioning signals from the U.S. Dollar Index and futures for the 10-year Treasury, both of which are key short-term drivers of the gold price that were also near extreme levels.

Based on that analysis, the World Gold Council observed that the signal improved meaningfully and suggested a high probability of positive forward returns for gold. However, it added that those indicators aren't informative for the present because we've moved away from the extremes.

Thus, the World Gold Council started looking at other factors to discern potential upcoming movements in the gold price. It started with the independent behaviors of the long and short positions and added gold ETF flows to try to figure out if futures position could have a leading edge on ETFs, which so far have hesitated to join the gold rally.

Since the September low, the gold price had gained 15% up to the World Gold Council's January report. The council noted that the 15% rally was similar to the gains in the three previous rallies, both of which it described as "strong and durable," although the 2015 rally was "marginally less so."

The World Gold Council pointed out that the falling U.S. dollar, recession risk, expectations of falling interest rates in the future, elevated geopolitical risks, high inflation, and purchases by central bank all provided fundamental support to the latest gold rally. In January, the council expected many of those factors to continue this year, just as they have.

According to the World Gold Council, analyst forecasts for the gold price look "overwhelmingly" in favor of "modest" gains for this year. On the 2023 LMBA previous metals forecast survey, 20 of the 24 analysts predicted that the gold price would rise this year. Meanwhile, 14 of the 16 active Bloomberg analysts predicted a higher gold price in 2023. 

Will gold ETFs add to the rally?

Of course, one feature that suggests a rally could be sustainable is that it's driven by an increase in long positions rather than covering of short positions. The World Gold Council found significant activity on the long side the latest rally. 

In fact, the long activity was similar to what it observed in the previous three post-low rallies. Meanwhile, short covering was "more muted" than in those previous rallies, which the World Gold Council believes could indicate some level of skepticism remaining because there are still shorts that haven't capitulated yet. 

The council also pointed out that global ETFs had shunned this year's rally. It observed a stark contrast between North American ETF flows, which account for about 50% of global ETF holdings, in the most recent rally compared to those from the three previous rallies. The most recent rally saw no apparent participation from gold ETFs globally.

Although futures led the latest gold rally, the World Gold Council predicted that gold ETFs will follow, driving the gold price higher.