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Breaking down gold price action: this is what institutional investors react to - LBMA

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(Kitco News) Gold is being pulled in different directions by opposing drivers, creating a confusing environment for investors, according to the LBMA/LPPM Global Precious Metals Conference 2022.

Persistently high inflation is mixed in with continued dollar strength and strong gold ETF outflows. On top of this, there is very robust physical demand. But it won't be until markets see a pivot from the Federal Reserve that gold might have room to move higher.

Rhona O'Connell, head of market analysis of EMEA and Asia Regions at StoneX, James Steel, chief precious metals analyst at HSBC Securities, and Suki Cooper, executive director of precious metals research at Standard Chartered, summarized the highlights from the conference in their wrap-up webinar Thursday.

In the current market environment, gold's institutional investors are not reacting directly to the latest inflation numbers or future inflation expectations, said Steel.

"Gold institutional investors don't react so much to the latest inflation data. They react to the anticipated monetary response to that data. And right now, it's tightening," Steel described. "And this was a theme right throughout the conference — the Fed and other central banks continue to tighten, which is lending support to the dollar, and as a consequence, one can't expect gold to do much better. It has done relatively well, particularly in non-dollar currencies."

Dollar, gold, silver in 12 months?

The dollar, which has weighed heavily on gold in USD terms this year, is expected to remain strong into next year, but only to a point, added Steel, describing the conference's outlook.

The price forecasts from the conference's poll saw gold at $1,830.50 an ounce in 12 months and silver at $28.30 an ounce, which is a 10.7% and a 51.4% advance from current price levels, respectively.

"We can probably all agree that the gold market would be higher … but it all came back to this persistent dollar strength, which effectively masked higher gold prices," Steel said. "[Conference participants] expected the dollar to stay strong, but only up to a point next year … and that might be where gold could have some breathing room to rally."

Some of the potential drivers to watch would be continued deglobalization trends, which would keep inflation pressures elevated for longer and increase the costs of production for precious metals. The analysts also noted a lack of investment on the mining side, which could be a potential problem on the horizon that could impact prices.

Logistics and shipping

Quickly rising shipping costs for precious metals were another popular topic during the conference.

The analysts noted that global freight costs rose five times in the space of less than a year and that it was now cheaper to fly silver rather than ship it by sea. This led to higher premiums that consumers were willing to pay.

"Previously, 73% of vessels were on time, and now it's closer to 35%-40%, and it is more costly," Cooper described. "To be able to have the metal delivered more reliably, consumers were prepared to pay for that higher cost."

Physical market, price, and Fed pivot

Silver demand was also very strong in India this year, with imports looking to finish the year at 10,000 tons compared to the previous average years of about 6,000 tons, the analysts said.

However, this "enormous underground demand" for precious metals has not translated into higher gold or silver prices because of ETF liquidations, Steel pointed out. And this was in part due to macro drivers like rate hikes and dollar strength, he added.

The physical market has been able to absorb most of those liquidations, which made analysts question where the gold price would be if that strong physical demand weren't there.

Cooper said she is looking for continued gold-backed ETF outflows for the rest of the year, which would weigh on prices. Next year, Standard Chartered is looking for a small net inflow. "Turning point comes when the Fed pivots. The dollar strength is likely to persist in the next few months," she added.

All three analysts agreed that ETF flows tend to have a significant impact on the price of gold.

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