(Kitco News) - Gold's correction below $1,900 after its best start to the year in a decade might not be over, as one market strategist warns that the precious metal is still overpriced.
In an interview with Kitco News, Huw Roberts, head of analytics at Quant Insight, said that gold is slightly overvalued according to his firm's modeling. He added that at its recent peak, gold was about 6.5% above its fair value.
Roberts added that while the correction has cooled the market a little bit, the bullish macro-environment is starting to turn, which could keep pressure on gold in the near term.
"We have macro warranted fair value at $1,822, so the price still has a little bit further to come down," he said.
As to what has been driving gold's outperformance, Roberts speculated that record central bank gold demand has driven bullish sentiment. Gold prices bounced off a two-year low in November after the World Gold Council reported that central banks bought nearly 400 tonnes of gold in the first quarter. Expectations started to grow that central banks would continue to purchase unprecedented amounts of gold.
Last week, the WGC reported that central banks bought more than 800 tonnes of gold in the second half of last year, accumulating 417 tonnes between October and December. 2022 ended up being a record year, with central banks adding 1,136 tonnes of gold to global foreign reserves.
Roberts added that this bullish fundamental backdrop also came at a time when bearish speculative positioning was at a multi-year high.
"Basically, you had all this fast money jumping on reserve managers buying gold and this broader de-dollarization theme. That explains a part of the price action we have seen," he said.
However, Roberts said that it looks like the momentum from central bank purchases has run its course and now investors are focused on global monetary policies, which could prove problematic for the precious metal.
It's not just gold that has been overvalued. Roberts said that, in general, risk assets have been overvalued as investors focus more on cooling inflation pressure and less on the Federal Reserve's messaging.
"We've seen an amazing start for risky assets and almost the riskier, the better," he said. "I would stick to the idea that it's just a typical January chopped fest. The consensus was so far one way at the end of the year that positions got squeezed and now we are flushing those out and then we go again."
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| WGC says central bank gold demand hit an all-time high in 2022 |
Last week, after the Federal raised interest rates by 25 basis points, markets started pricing in the end of the current tightening cycle, which includes a possible rate cut by the end of the year. While Federal Reserve Chair Jerome Powell did say disinflation signs have started to appear, he also noted that the central bank's job is not done yet.
He added that the central bank is not looking to cut rates anytime this year.
"The genesis of the disagreement between markets and central banks at the moment is the inflation profile," he said. "From the bond market perspective, markets are pricing in a quick soft landing. But if you look at inflation and the Fed projections, they don't have that scenario and that is the difference."
Roberts said that investors need to pay attention to money markets, and if they start pricing in a terminal rate above 5%, that could be the catalyst for a selloff in risk assets again.
With both gold and equity markets overvalued on potential miss-priced interest rate expectations, the question among investors is what is undervalued. Roberts said that they are starting to look at defensive assets.
He explained that the QI modeling shows utilities could be an interesting play as they are undervalued compared to the S&P 500. However, he added that the time still isn't there.
"There are three criteria we need for an actual signal. The first one is model confidence. We got that. We are in a strong macro regime. Then we need a big valuation gap. In the case of utilities versus the broader market, it's nearly two standard deviations cheap. That's a big gap. But the last box to be ticked is the trend and it's not there yet," he said. "We want to see more of a bottom in utilities."
In the precious metals sector, Roberts said they are also keeping an eye on silver as its recent selloff has pushed it below QI's modeling of fair value.
However, he added that with a potential recession looming, the macro regime for silver is starting to turn negative, which could continue to weigh on prices.
