(Kitco News) – Even as the market signals overbought conditions and Asian demand dries up, the increasing chances of a direct military confrontation between Iran and Israel is driving safe-haven inflows into gold, according to Daniel Ghali, commodity analyst at TD Securities.
“Selling activity in Gold has been a bit limited, but the top traders still liquidated nearly 5t of notional Gold over the last week,” Ghali said in a research note. “This contrasts with Western investor sentiment. Our read of macro fund positioning remains at its highest levels since the Brexit referendum in July 2016; re-levering from risk parity and vol-target funds is supporting a reaccumulation from CTAs and prices continue to rally without challenge.”
Ghali said that American and European interest is being driven primarily by worries about inflation and currency debasement.
“For Western investors, concerns surrounding monetary inflation are mounting as participants read the Fed's reaction function as asymmetric, at a time when the US economy remains decent by many measures,” he said. “We expected a more measured normalization of monetary policy to challenge bloated positions, given an aggressive global easing akin to current market expectations has typically occurred in response to deteriorating economic or financial conditions.”
“This prospect of monetary inflation has historically benefited Gold prices, but make no mistake, in real terms, prices are already challenging levels not seen since the 1980s, macro fund positioning is already extreme, central bank buying activity has slowed, and rebooting confidence in Asia could sap a major driver of demand for Gold,” he added. “In the immediate-term, the prospect of a direct confrontation between Iran and Israel is driving even more capital towards Gold.”
Ghali has been a voice of caution among the chorus of bulls in the precious metals markets of late. Earlier in September, he warned that the gold market appeared overbought according to several key metrics, and prices could slide by $200 or more per ounce.
“I absolutely think there's risk,” Ghali said of $2,500 gold. “The setup today in gold markets, any way you slice, it is just not the same as it was a few months ago.”
Ghali said that heading into 2024, there was a historic dislocation between money-manager positioning in gold and the market’s rate expectations.
“That's really what, in our opinion, kicked off the rally in gold markets,” he said. “They were historically under-positioned, and that was curious, heading into what was widely expected to be the first year of a rate-cutting cycle. The rally was then extended by very significant buying activity in physical markets.”
But Ghali said the situation in the gold market has shifted dramatically since that time.
“When you fast forward to today, money manager positioning isn't just bloated, it is at historical maximum levels,” he said. “We're talking about the same levels that marked very significant local highs around the Brexit referendum in 2016, around the ‘stealth QE’ narrative in 2019, around the same levels that it was during the peak of the Covid crisis in March of 2020.”
“In our view, so many of these bullish narratives that are being discounted by investors have already been baked into the cake,” he added.
“And at the same time, physical markets are completely different than they were a few months ago,” Ghali said. “There is a buyer’s strike in Asia. Mind you, most of that buying activity was actually probably related to a currency depreciation hedge, to retail investors in part looking to diversify their wealth at a moment in time when property markets were crashing in China, stock markets were crashing, bond markets weren't necessarily seen as a good investment, so there really wasn't any other alternative than to move your capital into gold.”
Ghali said that the outlook that markets are pricing in today is totally different. “We are talking about a soft landing that's underscored by a pretty aggressive rate-cutting cycle,” he noted. “Capital should move from areas where it's least productive to most productive, so if the market is right about this global macro expectation, then you would actually expect capital to move to more productive uses, and that's just inconsistent with what is currently priced into gold.”
Asked what price he would be looking to buy back into gold, Ghali said he’d be targeting a significant drop from current levels.
“We think a price closer to $2,300 is reasonable relative to the historic analogies that we spoke about,” he said. “Moments in time where positioning is as stretched as it is today have historically resulted in a 7% to 10% drawdown, so that seems reasonable to us.”
Spot gold slid as low as $2,643.81 per ounce in early trading on Wednesday but staged a recovery after the second bounce near $2,644 just before 8:30 am EDT.
Spot gold last traded at $2,656.05 per ounce and is down 0.28% on the session.
