Gold in search of fresh momentum

Gold trades higher after spending the past couple of weeks fending off sellers looking for lower prices in response to a recent jump in US Treasury yields after the US FOMC kept its hawkish stance, talking about the need for another two rate hikes before year end to fend off continued inflationary pressures. So far, however, traders have balked at pricing in more than one hike, and together with fresh dollar and yield softness following Friday’s weaker than expected US job report gold has managed to claw back some lost ground, potentially supporting fresh momentum, primarily driven by technical signals and funds reducing bets on lower prices 

In Saxo’s recently published Q3-2023 Outlook titled “AI: The good, the bad, and the bubble” I wrote the following section about gold and silver:

Following a strong run-up in prices since November, gold spent most of the second quarter consolidating after briefly reaching a fresh record high. Sentiment is currently challenged by the recent stock market rally and the prospect for additional US rate hikes, thereby delaying the timing of a gold supportive peak in rates. So while the short-term outlook points to further consolidation below 2,000 dollars per ounce as we await incoming economic data, we keep an overall bullish outlook for gold and silver, driven among others by: continued dollar weakness; an economic slowdown, making current stock market gains untenable, leading to fresh safe-haven demand for precious metals; continued central bank demand providing a floor under the market; sticky US inflation struggling to reach the 2.5% long-term target set out by the US Federal Reserve (and if realised, it will likely to trigger a gold-supportive repricing of real yields lower), and a multipolar world raising the geopolitical temperature. In addition, silver may benefit from additional industrial metal strength, which could see it outperform gold. Overall, and based on the expectations and assumptions mentioned, we see the potential for gold reaching a fresh record high above $2100 before year-end.

We are heading into a four-to-six-week period where liquidity tends to dry up as traders and investors leave their offices for a while to enjoy some quality time with families and friends. During this time, lower liquidity can lead to higher volatility as market-related news may trigger a larger than normal price response. Apart from December, July has for the past five years delivered the strongest average return, and whether history can repeat itself will depend on incoming US economic data, starting with Wednesday’s CPI print which is expected to show a decline in headline and core inflation to 3.1% and 5% respectively. If confirmed if may further soften the markets belief in higher US rates and with that the risk of a recession. However, given the current focus on a market supportive slowdown in US inflation, a stronger than expected report may trigger an outsized negative reaction which may challenge gold’s ability to hold onto recent gains.

Investor flows across some of the major commodity Exchange-traded funds show a heavy outflow from gold-backed funds this past month. During this time, as mentioned, the yellow metal has been dealing with rising Treasury yields and stock markets in feisty mood, reducing the need for alternative investment. However, given the rejection below $1900 it highlights underlying demand from others, and with hedge funds holding a near unchanged position during this time the focus once again turns to central bank demand. Not least from the so-called BRICS countries, who according to Russian sources are planning to introduce a new trading currency, which will be backed by gold. While we are highly skeptical about such an attempt to dethrone the dollar, there is little doubt that the de-dollarization demand for gold which led to record central bank buying last year is continuing, thereby helping to provide a soft floor under the gold market. Central bank demand for gold reached 228 tons during Q1’23, a 176% year-on-year increase.