Gold never fails to impress and surprise investors

(Kitco News) - I have been covering precious metals markets for more than a decade, and even with all this experience, the market still has the potential to surprise me and there are still hidden depths to the market to be explored.

This week is a prime example of how gold and silver continue to defy the odds. The price action we have seen continues the pattern established in 2023 that propelled prices to record highs.

The Federal Reserve continues to maintain a restrictive monetary policy, holding the Fed Funds rate at its highest level in nearly two decades. Yet, gold has managed to hold critical support levels, consolidating within a broad-based uptrend.

This past week, investors received a clear message from the Federal Reserve that although they are preparing to lower interest rates this year, they are in no hurry just yet. The nail in the coffin of a rate next month was pounded in on Friday after data showed the U.S. economy created a whopping 353,000 jobs last month, significantly beating expectations. At the same time, wages increased 0.6% and are up 4.5%.

Heading into the weekend, markets see only a 20% chance of a rate cut in March, and they have pared back expectations for a rate cut in May.

At the same time, investors continue to pile into equities, pushing the S&P 500 and Dow Jones Industrial Average to new all-time highs.

Despite these headwinds, April gold futures are ending the week with nearly a 1% gain, with prices testing resistance around $2,050 an ounce.

To understand this underlying strength in the gold market, you need to read the World Gold Council’s year-end/fourth-quarter global trends report, which measures physical demand in the marketplace.

According to the report, 2023 saw a record gold demand of 4,899 tonnes, driven by central bank purchases and activity in over-the-counter markets. Excluding the opaque OTC markets, gold demand actually declined to 4,448 tonnes, down 5% from 2022 levels.

“The net outcome of a double-digit gold price return (USD) suggests that hidden within the opaque OTC and Other category was some healthy demand from investors. The main themes underlying these developments were the avoidance of a US recession, continued weakness and asset volatility in China, as well as no let-up in global geopolitical tension,” the analysts said in the report.

At the same time, central banks missed the 2022 record by 45 tonnes as they purchased 1,037 tonnes of gold last year. In the previous two years, central bank demand has nearly doubled the average of the last ten years.

This week, Nicky Shiels, head of metals strategy at MKS PAMP, provided some interesting analysis of the WGC’s research, noting that central bank purchases were 25x larger than known investor outflows.

“Net total flows of +32mn oz ([central bank] +33.3mn oz less investor of -1.4mn) is 1) the fourth largest in this data set, obviously carried by CB demand, 2) should translate into gold price performance in 2023 of 12.1% which is exactly what gold posted last year,” she said her note.

While it’s unlikely central banks will buy more than 1,000 tonnes of gold for a third consecutive year, the WGC expects that demand will continue to match the 10-year average. The analysts note that the reasons central banks are diversifying into gold has not changed and are unlikely to any time soon.

Looking ahead, what can we expect for gold for the rest of the year, given the humdrum price action in January? Leading market analysts surveyed by the LBMA collective see gold prices hitting new record highs this year with an average price of $2,059 an ounce, representing a 6.1% gain from last year’s average price.

So, just sit back and enjoy the ride. Have a great weekend.