TD Securities going long gold, says hunting season is now open

(Kitco News) - The gold market is struggling to find some bullish momentum after the U.S. central bank significantly pushed back on expectations of an aggressive easing cycle kicking off in March. However, one Canadian bank says now is the time to buy for an inevitable rally.

Monday, commodity analysts at TD Securities published a note, saying they have initiated a tactical long gold trade and are looking for significantly higher prices in the next three months.

The bank said they entered their long gold trade at $2,035 an ounce and are looking for prices to reach $2,250 an ounce. On the downside, the trade has a stop loss at $1,910 an ounce. April gold futures last traded at $2,038 an ounce, down 0.76% on the day.

The bullish trade comes as gold starts the week seeing considerable selling pressure as prices fell below a significant support/resistance level at $2,050 an ounce. Gold is struggling after Powell, Sunday night, in an interview with CBS’ 60 Minutes, reiterated the central bank’s stance that it is not ready to cut rates in March.

In the interview, Powell said that the central bank doesn’t want to risk easing too soon, which could cause inflation to settle well above its 2% target.

“We want to see more evidence that inflation is moving sustainably down to 2%,” Powell added. “Our confidence is rising. We just want some more confidence before we take that very important step of beginning to cut interest rates.”

While a March rate cut is off the table, the central bank still expects to ease interest rates this year, which Daniel Ghali, Senior Commodity Strategist at TD Securities and author of the latest trade note, said is the most important factor for gold.

In a comment to Kitco News, Ghali said that the Fed is still on track to lower interest rates in May, which has been TDS’ base case scenario.

“Whether it’s March or May is largely irrelevant,” he said. “What the gold market does care about is the total amount of rate cuts priced in the next 12 months or so.”

Ghali said that TDS is expecting the Federal Reserve to lower interest rates four or five times this year, which is slightly down from initial market expectations for around six rate cuts this year.

Ghali said four rate cuts will be enough to attract new investors to the marketplace, “given the cohort's positioning is now at least -40k lots below levels implied by current pricing in the Fed funds futures curve.”

“Macro traders appear historically under-positioned for a Fed cutting cycle, and our analytics suggest this cohort may now have built a sizable net short position in response to the recent string of hot data,” Ghali wrote in his note.

At the same time, Ghali noted that there are a lot of traders sitting on the sidelines that could jump, and robust Chinese demand continues to provide critical long-term support.

“CTA trend followers still hold substantial dry-powder to deploy, physical market buying activity has remained strong, and China is buying gold at a fast clip beyond the seasonal upswing tied to Chinese New Year,” he said. “These pillars should limit the downside risk associated with fewer total Fed cuts priced into the next twelve months, tilting the balance of risks to the upside, with more extreme convexity to lower rates.”

Last year, in its 2024 outlook, commodity analysts at TDS said they see gold prices averaging the year around $2,019 an ounce and peaking in the second quarter as prices average around $2,100 an ounce between April and June.