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Can gold's rally last as ETF investors continue to ignore the market

Kitco News

Welcome to Kitco News' 2023 Outlook Series. Uncertainty continues to dominate financial markets as central bank monetary policies push the global economy into a recession to cool down inflation. Stay tuned to Kitco News to learn from the experts on how to navigate turbulent financial markets in 2023.

(Kitco News) - The new year is proving to be a solid start for the gold market as prices end the week near a nine-month high.

The gold market has rallied for five-straight weeks as prices are up more than 5% in the first month of 2023. And while there is strong bullish sentiment in the marketplace because, there is still one piece of the market missing.

Investors are still not jumping into the market, causing some analysts to question how sustainable this new rally is. While gold prices have rallied 5% this year, data from the world's largest gold-backed exchange-traded fund, SPDR Gold Shares (NYSE: GLD), shows that ETF demand continues to fall.

As of Jan. 19, GLD's gold holdings have dropped 5.21 tonnes. The question is: does the price follow broader investment demand, or will ETF purchases pick up to reflect the bullish sentiment in the marketplace? The outflows in the ETF market have slowed, but they haven't ended.

At the same time, there are concerns that silver is not seeing the same bullish sentiment as gold. After outperforming gold through November and December, silver appears to be treading water at around $24 an ounce.

Silver's lack of momentum is also a stark contrast to what is happening in other industrial metals like copper, which is trading at a seven-month high of around $4.26 a pound.

It will take some time for these market divergences to work themselves. Still, there are reasons to be hopeful that investors will eventually see the value in holding precious metals.

This week Bank of America published a very bullish report on gold; the analysts said that they expect the precious metal to be a mainstay asset for the next three years.

And Bank of America is not alone in its bullish outlook. In November, European fund manager HANetf surveyed 100 European and British wealth fund managers. According to the results, 89% of those respondents said they intended to increase their exposure to gold.

"It now may be the case that a lot of the negative sentiment towards gold has passed," said Tom Bailey, head of ETF research at HANetf, in the report.

As to what is driving sentiment in precious metals, the biggest factor continues to be weakness in the U.S. dollar; the U.S. dollar index has fallen more than 10% since its 20-year high in September.

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According to analysts, the U.S. dollar is losing momentum as markets expect the Federal Reserve to slow its aggressive tightening cycle. Markets have all but completely priced a 25 basis point move from the U.S. central bank next month.

In an exclusive interview with Kitco News, esteemed economist David Rosenberg said that he expects the February meeting to be the Federal Reserve's last hike. He added that the impending recession will force the central bank to start cutting interest rates sometime in the second half of the year.

In this environment, he expects gold to be an attractive asset and sees prices rallying to new record highs above $2,000 an ounce this year.

With so much bullish sentiment in the marketplace, many analysts think it's only a matter of time before investors jump back into gold.

On a final note, the Kitco News team would like to wish everyone a happy Lunar New Year and may the Year of the Rabbit be prosperous for everyone.

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.