(Kitco News) - The gold market is roughly $25 from December’s record highs, and although Monday’s rally, which has pushed prices above $2,100 an ounce, is shocking, it’s not entirely unexpected.
Many analysts have noted that gold’s rally came out of nowhere and was ignited following disappointing second-tier economic data in the U.S. At the same time, Analysts also pointed out that both gold and silver were ripe for a potential short squeeze as sentiment has been dismal since the start of the year.
Some analysts have likened gold’s consolidation to a coiling spring with the market just waiting for a catalyst.
The drive to record closing prices came as the Commodity Futures Trading Commission’s disaggregated Commitments of Traders report for the week ending Feb. 27 showed relatively neutral positioning as bullish bets remained near a four-month low. At the same time, positioning in the silver market remained net bearish.
Analysts note that Friday’s rally has drastically changed sentiment in the marketplace, and the market still has plenty of upside potential.
“The commitment of traders data highlighted the uncertainty in the market as discretionary traders added shorts roughly in line with new length, highlighting that macro traders remain historically underinvested for a Fed cutting cycle,” said commodity analysts at TD Securities. “But, with that said, this represents a cohort that can still add further upside in the market once the macro landscape is forecasted with more conviction.”
Ole Hansen, Head of Commodity Strategy at Saxo Bank, also noted that investors have been under-invested in gold, given that the Federal Reserve is still expected to cut rates, albeit at a slower pace than initially expected.
Hansen noted that Thursday’s benign inflation report means the Federal Reserve can start its easing cycle before the end of the first half of 2024. Currently, markets see a 60% chance of a rate cut in June.
In a recent interview with Kitco News, Sean Lusk, Co-Director of Commercial Hedging at Walsh Trading, said he sees potential for this new momentum to push gold prices to $2,175 an ounce. He noted that while investors should not try to chase the market, it's difficult to ignore the momentum.
“We have been consolidating for a while now, so this could have some teeth to it,” he said.
However, some market analysts are not yet completely convinced that gold can break above $2,152.3 an ounce as one crucial segment of investment demand continues lackluster demand.
As gold prices rallied nearly 2% to their record closing price Friday, the world’s biggest gold-backed exchange-traded fund, SPDR GoldShares (NYSE: GLD) saw inflows of less than 1 tonne.
So far this year, more than 55 tonnes of gold have flowed out of GLD.
Philip Streible, chief market strategist at Blue Line Futures, said that he has been taking advantage of gold’s momentum but doesn’t have much conviction in this rally just yet. He added that he is maintaining tight stop losses in his long positions.
Some analysts have said that although gold is starting the week off on a strong note, the big test starts mid-week as Jerome Powell testifies before Congress on Wednesday and Thursday. Friday’s nonfarm employment data is also expected to create some volatility in the market.
“Gold looks like it’s considering a run towards the record highs hit in December after logging the highest close on record last Friday. With little visible technical resistance evident on the charts, whether it gets there will likely come down to what happens with the U.S. dollar and bond yields over the coming days,” said David Scutt, Market Analyst at City Index.
