Gold Shows ‘Unprecedented Strength’ in Record Rally. Warning Signs Are Flashing.

Gold prices continue to defy a slump in markets, as the precious metal pushed to a record high on Wednesday in what could be its seventh straight day of gains. While the rally has support, at least one analyst is raising the alarm bell after such a run.

Continuous-contract gold futures were up 1.3% on Wednesday and traded as high as $2,312.50 per troy ounce, an all-time high. The yellow metal has surged 11.5% so far this year.

Over the past five days, gold has risen 4.3%, bucking declines in stock and bond markets, where the Dow Jones Industrial Average and S&P 500 have slipped back from their own peaks this week.

“Gold continues to defy gravity,” Achilleas Georgolopoulos, an analyst at broker XM, wrote in a note. “It is showing unprecedented strength and manages to rally under every market scenario.”

Indeed, gold has notched gains amid what could look like contradictory catalysts.

Prices marched higher in recent weeks amid expectations that the Federal Reserve will soon cut interest rates, which would put downward pressure on bond yields and the dollar, a trend typically benefiting gold. But the precious metal continued rising this week as inflationary signs in economic data put rate-cut bets under pressure—a factor that knocked stocks—as traders seemingly sought it out as an inflation hedge.

“The lower dollar could have been a factor in yesterday’s move, but gold has rallied even in dollar-positive days,” wrote Georgolopoulos. “This is another indication that other forces are in play such as strong buying appetite from certain sovereigns trying to diversify their dollar holdings.”

But there is also far more to gold’s rally than just the pillars of rates, inflation, and the dollar.

“Support has come from a few segments where demand has held up particularly well. Indeed, central banks themselves keep adding gold to portfolios,” analysts at Bank of America wrote in a note. “This has perhaps been most visible in China, where the PBOC [People’s Bank of China] has been increasing its exposure. That buying has also attracted purchases from China’s retail market participants.”

Indeed, Chinese gold-buying has been a key part of the narrative amid the yellow metal’s latest rally. While China’s central bank has been a steady buyer, “the biggest driver appears to be buying from retail investors,” analysts at research firm Gavekal Dragonomics wrote in a note.

They added that as China’s property sector has collapsed and its stock market has languished, “a larger portion of China’s household savings is flowing into gold as an alternative.”

While gold continues to benefit from fundamental support—and the momentum from this latest rally has possibly drawn in new investors—such a rapid pace of gains for a typically stalwart and stodgy commodity risks looking overdone.

“Warning signs are flashing,” Kathleen Brooks, an analyst at broker XTB, wrote in a note. “At this stage it is hard to see the gold price coming under severe downward pressure, but we would point out that open interest on gold contracts appears to have peaked and the gold price is now 15% above its 200-day simple moving average. This suggests that it is at extreme levels and could be due a pullback.”

A correction could take some of the shine out of the yellow metal. But as other analysts point to reasons for gold to keep gaining, it may not be worth betting against bullion just yet.