Carsten Menke, Head, Next Generation Research at Julius Baer
Gold prices have reached new multi-month highs recently, but we struggle to see who is in the driving seat of these moves. Investors are still on the sidelines of the gold market, and in fact have even become sellers.
Meanwhile, Asian demand does not show signs of strength, and Dollar and US bond yields seem to be playing less of a role of late after lifting the markets during the past few weeks. All in all, we reiterate our view that prices are on a somewhat soft footing and that we would not chase this rally.
The gold market is becoming more and more puzzling. While prices have reached new multi-month highs recently, trading at around $1,930 per ounce, we struggle to see who is in the driving seat of these moves.
Investors are still staying on the sidelines of the market as indicated by stagnant holdings of physically-backed products. Historically, these holdings have moved in line with gold prices, reflecting the appetite of western world investors.
The same can be said for silver, where investors even started selling again of late.
As far as Dollar and US bond yields are concerned, while their decline has been an important driver during the past few weeks, lifting the market mood for both gold and silver, it appears to be playing less of a role at the moment. Put differently, if the Dollar and bond yields were still in the driving seat, they should have lifted both gold and silver prices further, but they have been diverging as of late, and prices of gold and silver declining along with bond prices.
Typically, silver tends to outperform gold in times of a weakening Dollar and falling US bond yields.
Looking at Asia, judging by the price premiums paid in Mumbai and Shanghai over London, demand does not seem to be overly buoyant. In fact, according to import data, Indian demand dipped quite strongly in December, while China’s restocking efforts, which started in May of last year, also seem to have lost steam. Meanwhile, physical deliveries on the Shanghai Gold Exchange have been moving in line with long-term averages as of late.
Coming to central banks, following record-high purchases in the third (festive) quarter of last year, we would be rather surprised to still see them buying gold at the same speed. That said, this is the most opaque segment of the gold market, which leaves a lot of room for speculation.
All in all, we reiterate our view that due to the lack of support from investors, both gold and silver prices are on a somewhat soft footing, and we would not chase this rally. Against the backdrop of prevailing cyclical challenges and the elevated risks of a recession in the United States, we also believe that a rapid reversal does not look very likely.
Reflecting this, we lift our 3- and 12-month targets to $1,850 and $1,725 per ounce for gold, and $23 and $21.5 per ounce for silver.
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