(Kitco News) - Western investors appear to be finally having a positive impact on the gold market, or at the least, they are not getting in the way of higher prices, according to one market analyst.
In his latest comments on the gold market, Carsten Fritsch, precious metals analyst at Commerzbank, said that current market conditions, while supportive for gold, do not fully explain the precious metal’s rally to a new record high above $2,450 an ounce.
Although gold prices have fallen from their all-time high at the start of the week, they continue to hold initial support above $2,400 an ounce.
Fritsch said that a short-term shift in investor demand in gold-backed exchange-traded funds (ETFs) is the only significant factor explaining gold’s recent price action.
Trading data from SPDR Gold Shares (NYSE: GLD) shows that its gold holdings have seen a modest increase, rising by eight tonnes in the last 11 days.
Fritsch added that Friday saw GLD’s biggest one-day increase in holdings in two months.
“It is not yet possible to say with certainty that the period of net outflows that has lasted for almost a year has come to an end. However, in contrast to previous periods in which gold ETFs recorded outflows, the gold price was not weighed down by these in recent months,” he said. “ An end to the outflows and the onset of inflows would put the rise in the gold price on a more solid footing.
Some analysts have said that gold’s renewed momentum was triggered by solidifying expectations that the Federal Reserve is still on track to cut interest rates twice this year; however, Fritsch said that this scenario is unlikely to have much impact on gold.
“However, this thesis cannot be confirmed looking at the Fed Fund Futures. After all, expectations of interest rate cuts only increased slightly immediately after the publication of the US inflation data last Tuesday. In the following days, they have fallen back again. The Fed funds rate expected at the end of the year was even slightly higher on Monday than a week earlier,” Fritsch said.
Fritsch added that the overall theme of robust central bank demand is also insufficient to explain gold’s current price action, even as it provides long-term support for the precious metal.
“The majority of purchases in the last two years have been invisible, i.e. not directly disclosed in the currency reserves of the central banks. This part of the purchases is only published once a quarter by the World Gold Council. This feeds speculation that the central banks are also buying large quantities of gold now. In contrast to the speculation about interest rate cuts mentioned above, this speculation cannot be proven wrong,” he said.
Although gold’s historical correlation with U.S. bond yields and interest rates has broken down, Fritsch said this factor will still create some market volatility.
He added that any shift in market expectations that pushes back the timing of rate cuts could bring more sellers into the gold market through the summer.
“We assume that the Fed will cut interest rates for the first time not before December. In contrast, the market expects a rate cut in November or possibly even as early as September. Furthermore, we do not expect a pronounced cycle of interest rate cuts, but only three interest rate steps totaling 75 basis points. For this reason, we expect the gold price to fall to USD 2,300 per troy ounce in the second half of the year,” he said.
However, Fritsch also acknowledged that risks to his short-term gold outlook lie on the upside, as central bank demand could remain the dominant factor in the gold market.
“If this is the case, interest rate expectations could also begin to take effect again at a higher price level, meaning that an otherwise expected or necessary price decline would not materialize or would be significantly smaller,” he said.
