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Gold’s behaviour points to sustained strong demand
Commodities
Ole Hansen
Head of Commodity Strategy
Summary
Gold remains a buy-on-dip market, defying the normal negative impact of dollar and yield strength
Rallies that happen for no apparent reason - like today - should be respected
Supported by industrial metals, silver heads for a strong month despite a failed breakout attempt
Gold’s strong March rally culminated last week when the yellow metal briefly surged to a fresh record high at USD 2,221 per ounce, after the FOMC stuck to their three rate cut projections for this year, only to suffer another mild round of profit taking as the dollar continued higher. Overall, gold is heading for a March gain around 7% while silver has managed a near 10% rally, both after suffering mild setbacks during January and February when the dollar and US Treasury yields rose in response to traders adjusting inflation expectations higher, and rate cut projections lower.
Overall, gold continues to defy the normal negative impact of dollar and yield strength, both of which have risen this year, instead the metal has been supported by safe demand related to several geopolitical risks around the world, and not least continued strong underlying support from central banks and retail buyers of physical gold and jewellery especially from India and China. In addition, the early March break above USD 2,088 per ounce helped trigger a very aggressive buying response from technical and momentum driven hedge funds. During a two-week period to March 12, managed money accounts bought 9.2 million ounces or 285 tons, an amount it took ETF investors more than seven months to sell. To put it into further perspective, central banks have in each of the past two years bought more than 1,000 tons, again highlighting the aggressive nature of the recent fund buying.
Do note that this group of traders tends to anticipate, accelerate, and amplify price changes that have been set in motion by fundamentals. Being followers of momentum, this strategy often sees this group of traders buy into strength and sell into weakness. They are likely to have tight stops and no underlying exposure that is being hedged, and this makes them most reactive to changes in the fundamental or technical developments. In the short term, gold needs to hold key support levels in order to avoid a fresh round of profit taking, but so far the corrections seen have been shallow enough to prevent temporary price weakness through long liquidation.
After hitting a fresh record high last week, gold suffered another mild round of consolidation, however without challenging support at USD 2,146 followed by USD 2,132. Moves that happen for no apparent reasons are often ones that deserve some respect, and today’s rally back towards USD 2,200 is one of them, happening without any notably support from other markets, highlighting a continued strong buying on dip mentality in the market. We maintain our 2024 forecast for gold to reach USD 2,300, and silver USD 28, with the technical picture pointing even higher towards USD 2,500.
Silver, meanwhile, has for a while been struggling relative to gold, not least because the white metal has not enjoyed the mentioned support from central banks. During the past month, however, the semi-precious metal which derives around half of its demand from industrial applications has received a boost from a recovering industrial metal sector, not least copper which recently reached an 11-month high, supported by a tightening mined supply outlook and Chinese smelters discussing production curbs.
The improved outlook temporarily drove the gold-silver ratio down to a new year-to-date low around 85 ounces of silver to one ounce of gold, before reverting higher to the current 88.40. While gold has made several fresh record highs this past month, silver has yet to clear a key area of resistance between USD 25.75 and USD 26.15 per ounce, with the latest setback back towards support around USD 24.44 per ounce being driven by funds reducing bullish bets following the strongest three-week accumulation in almost five years
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