The increased possibility of a direct military confrontation between Iran and Israel is driving inflows into gold as a safe-haven asset, even as the market is flashing overbought signals and Asian demand is weakening, according to Daniel Ghali, commodities analyst at TD Securities.
“Gold selling activity was somewhat limited, but top traders liquidated nearly 5 tonnes of notional value of gold in the past week. This contrasts with Western investor sentiment. We observed macro fund positions reaching their highest level since the Brexit referendum in July 2016; re-leveraging of risk parity funds and volatility target funds supported CTA (commodity trading advisor) re-accumulation, and prices continued to rise unchallenged,” Ghali said in a research note.
Ghali said interest in the United States and Europe was driven mainly by concerns about inflation and currency devaluation.
He said: "For Western investors, concerns around monetary inflation are growing as participants perceive the Fed's response mechanism as asymmetric at a time when the US economy is still performing well on many indicators. We expect a more cautious normalization of monetary policy to challenge inflated positions, as such aggressive global easing is usually only seen when economic or financial conditions deteriorate."
He added: “This monetary inflation outlook has historically been bullish for gold prices, but make no mistake, in real terms prices have challenged levels not seen since the 1980s, macro fund holdings have reached extremes, central bank gold buying has slowed, and renewed confidence in Asia could weaken one of gold’s key demand drivers. In the short term, the possibility of a direct confrontation between Iran and Israel is driving more capital flows to gold.”
Ghali has been a cautious voice in the precious metals market lately. Back in early September, he warned that the gold market looked overbought based on several key indicators and that prices could fall by $200 or more.
“I think there is a real risk,” Ghali said of the $2,500 an ounce gold price. “The conditions in the gold market today, by any measure, are not like they were a few months ago.”
Ghali said there was a historic mismatch between fund managers' gold market positioning and market interest rate expectations as we head into 2024.
“That’s what we think triggered the rally in gold markets, which historically have been under-positioned, which is odd given the consensus expectation that this would be the first year of a rate-cutting cycle,” he said. “Then there was a lot of buying activity in the physical market that extended the rally.”
But conditions in the gold market have changed dramatically since then, Ghali said.
“When you fast forward to now, fund manager positioning is not just inflated, it’s at all-time highs, we’re talking about highs similar to the 2016 Brexit referendum, the ‘stealth QE’ narrative in 2019, and the height of the COVID-19 pandemic in March 2020,” he said.
He added: “We think a lot of the bullish narrative that investors are discounting is already priced in.”
“Meanwhile, the situation in the physical market is nothing like it was a few months ago,” Ghali said. “There is buyer resistance in the Asian market. Note that much of the buying activity may actually be related to hedging against currency depreciation and some retail investors seeking to diversify their wealth at a time when the real estate market and stock market are collapsing.”
Ghali said the market is pricing in a completely different outlook today. “We’re talking about a soft landing supported by a pretty aggressive rate-cutting cycle,” he noted. “Capital should move from the least productive to the most productive, so if the market is right about global macro expectations, then you should actually expect capital to move to more productive investments, and that’s not what’s reflected in gold prices right now.”
Asked at what price he would buy gold again, Ghali said he would target a significant drop from current levels.
“We think prices closer to $2,300 are reasonable relative to the historical analogs we mentioned,” he said. “When positioning is stretched like it is today, that historically leads to a 7% to 10% pullback, so we think that’s plausible.”
The article is forwarded from: Jinshi Data
