(Kitco News) - Bullish speculative momentum in the gold market is starting to weaken as prices test initial support at $2,150 an ounce; however, the market is also attracting new investment demand as gold-backed exchange-traded funds (ETF) begin to see meaningful inflows.
The shift started Friday as the world’s largest gold-backed ETF, SPDR Gold Shares (NYSE: GLD), saw inflows of nearly 15 tonnes, the largest one-day increase since October. The latest data shows GLD holdings increased by another 1.5 tonnes on Monday.
BMO Capital Markets commodities analyst Colin Hamilton, quoting data from Bloomberg, said that global gold ETFS saw inflows of 400,000 ounces Monday, “the largest inflow in four months and a sudden reversal of the trend outflows seen in March thus far.”
Although gold ETF demand is finally starting to show signs of life, Hamilton noted that the market still has a challenging hill to climb.
“Even with this, YTD gold ETF holdings are down 3.9%,” he said.
While ETF demand appears to be providing some support to the market, some analysts question just how much conviction these investors have.
In a comment to Kitco News, Ole Hansen, head of commodity strategy at Saxo Bank, said that not only are ETF investors late to the party, but the timing comes with many risks.
He pointed out that a shift in speculative momentum is a potential hazard for ETF demand.
“In a two-week period to March 12, specs bought 9.1 million ounces in COMEX futures, an amount it took ETF investors seven months to sell,” he said. “While I believe the direction is correct, I worry the timing is wrong.”
Hansen added that the Federal Reserve’s monetary policy remains the critical factor for gold prices. While he remains a long-term gold bull, Hansen said that the market needs to see an actual rate cut before investors jump into the gold market, kickstarting a new sustainable rally.
“I still believe we need to see clearer signs of the timing and depth of future rate cuts before real money asset managers will take a second look,” he said.
Hansen’s comments come as the Federal Reserve begins its two-day monetary policy meeting. The market is expecting the Federal Reserve to leave interest rates unchanged on Wednesday but that they will continue to signal three rate cuts later this year.
However, last week’s hotter-than-expected inflation readings have created a challenge for the Federal Reserve, as it has said it needs to be confident that inflation is falling to the 2% target before it starts to ease rates.
Despite the disappointing inflation data, Thu Lan Nguyen, head of commodity research at Commerzbank, said she doesn’t expect the Federal Reserve to adjust its messaging.
“Our economists believe that the central bankers are unlikely to change their assessment, leaving the ‘dots’ more or less unchanged,” she wrote in a note Tuesday. “This would probably be positive for gold, as some market participants are likely to expect an upward revision of interest rate expectations following the US inflation data.”
Looking at gold’s technical price action, David Morrison, senior market analyst at Trade Nation, said that although the market looks slightly vulnerable, $2,150 remains the critical support level to watch.
“Gold remains close to its recent all-time intra-day high of $2,195 hit earlier this month. If it can continue to consolidate around current levels, then further gains can’t be ruled out,” he said. “As with most markets, investors are sitting on their hands ahead of tomorrow’s Federal Reserve announcements. Few are willing to take positions until they have more clarity over the timing and number of rate cuts likely for this year and beyond.”
