This graph gives some insight into gold’s most recent rally towards $1000.

The top panel shows the price of gold in USD, and the bottom panel shows the 26 week rate of change of gold holdings in global ETFs.

It is clear that since the height of the financial chaos last year, there has been a huge move into gold ETFs. This demand has played a large part in sustaining gold’s outperformance compared to other assets over this time. However, it also looks like this strong demand may be peaking. If the recent support from money moving into ETFs wanes, gold may have trouble holding on to its recent gains.

Another consideration is that stocks and other riskier assets have shown some strength of late. Part of gold’s appeal in recent months has been its safe haven aspect, so as market participants start to become less risk-averse gold could struggle to breakout.

It seems more likely that gold will consolidate within a broad range of $700 to $1000 until it becomes clear to the market that monetary reflation through concerted quantitative easing is really starting to take hold.

On the plus side, as other countries continue to compete to devalue their currencies, gold should stay the overall winner. On the negative side, there may be further global deflationary scares to come which could push gold down again like in October last year along with everything else.

Silver has also caught up much of its lost ground last year, now trading above $14. Our models suggest continued strength in the precious metals compared to other asset classes, but a short-term fail to break last year’s high in gold is a possible risk.

More economic bad news could prevent a sustained breakout. Until it is clear that monetary reflation is working, gold could sit within a broad trading range.