Managed money accounts such as hedge funds and CTAs jumped into gold back in February and March at prices well below USD 2200, and deep in-the-money positions and with that the lack of selling pressure from position adjustments help explain why the yellow metal has only seen relatively small corrections during the past few months. As opposed to silver, which has suffered much higher volatility and bigger corrections after recent established longs were forced to reduce amid weakness across the industrial metals sector, not least copper.
Since April 2022 when the ETF holdings began reversing lower, gold has rallied from below USD 1900 to the current level around USD 2500, and it highlights gold’s strong support from multiple different sources other than yields, rates and the dollar, the most important being:
Geopolitical risks related to Russia/Ukraine, the Middle East and not least uncertainty regarding the November US president election.Strong retail demand in China amid the desire to park money in a sector seen as relatively immune to a struggling economy and property woes and the outside risk of the Yuan devaluing.Continued central bank demand amid geopolitical uncertainty and de-dollarisation, and not least gold’s ability to offer a level of security and stability that other assets may not provide. Rising debt-to-GDP ratios among major economies, not least in the US, raising some concerns about the quality of debt. In other words, rising Treasury yields are not necessarily negative for gold as they raise the focus on overall debt levels and the sustainability of those.In addition, we are now increasingly seeing the positive impact of an incoming US rate cutting cycle, a period that historically has seen the yellow metal perform well.
Traders will be looking to Wednesday’s US FOMC meeting for guidance, and while we expect the meeting to have a minimal impact on rates repricing, the market is likely to maintain expectations of upcoming rate cuts, potentially already from September, based on concerns that inflation is now on a downward trajectory to 2% while the US economy is slowing as consumers are pulling back on spending, which accounts for roughly 70% of the country’s economic activity.
Since April, gold has made three successive record highs, the latest to USD 2484 taking it close to our end-of-year target. With three US rate cuts priced in this year, as opposed to the FOMC’s projection of just one, some short-term disappointment cannot be ruled out, but overall the direction towards higher prices in the months and quarters ahead remains. Key support can be found in the USD 2280 area while short-term resistance has emerged around USD 2325.
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