What's capping gold price gains?
(Kitco News) Why is gold off its record highs so much considering the ample demand this year? Is gold undershooting? What is capping gold’s gains? Scotiabank has raised these questions in its most recent report.
The key question the gold market should be asking: “Is gold’s price action/response fair in light of [all the] inflows, and given how opaque the physical market/response is? For example, price-sensitive gold demand is due to hit 143m oz in 2019, which is the highest in WGC [World Gold Council] records; why isn't gold at record highs then?” Scotiabank asks in a report published this week.
The bank discovered that investor inflows have the best correlation to gold price fluctuations out of the combined demand fundamentals that include jewelry, central bank buying, and investor demand.
Based on Scotiabank’s model, gold should have gained 26% considering the strong central bank and investor demand in 2019, which equated to 54 million ounces.
“[But,] gold is currently up +14% YTD (with max annual gains seen in September of 21%), clearly undershooting what it is capable of,” wrote Scotiabank commodity strategist Nicky Shiels.
Gold’s price underperformance points to an “unknown supply response” that is capping gold’s gains, which could be either via “recycling, physical dishoarding, or hedging,” Shiels added.
Gold’s price direction into year-end will depend on re-emergence of central bank buying interest and renewal of investor interest in the yellow metal, Shiels pointed out.
“The macro narrative has shifted from ‘recession or no recession’ to ‘no recession or cyclical upturn’ … Given the notable lack of physical support, the critical gold support into year-end, rests on both structural investor interest recommitting and CB [central banks] interest reengaging to offset potentially strong fresh paper shorts (who are underweight),” she said.
Buying trends are especially important when it comes to supporting gold prices during sell-offs, Shiels explained.
“With the current Fed pause, buying trends are critically important in providing key support on price dips. The traditional gold attributes … are still intact but upcoming flows will provide insight on how relevant these are in light of trade hopes and current gold prices,” she said. “The key threat for gold lies with unengaged paper/COT shorts, [which] are underweight.”
So far this year, central banks have purchased 547.5 tonnes on a net basis, which is 12% higher year-over-year. Also, gold holdings grew by 258 tonnes in Q3, the highest level of quarterly inflows since Q1 2016, according to the WGC’s Q3 Gold Demand Trends report.