(Kitco News) - While gold has seen a substantial rally this year, the price action is up against a significant resistance level as it consolidates just below last month’s record highs, according to one market strategist.
In her latest note, Nicky Shiels, Head of Research and Metals Strategy at MKS PAMP, noted that even at record highs, the gold market faces a triple top as it has only achieved 30% annual gains three times in the last 30 years: the first in 2007 when prices rallied 31%, the second in 2010 when prices rose by 30%, and this year.
While gold reached its 30% milestone in September, prices have struggled in recent weeks as markets quickly shifted their expectations away from aggressive interest rate cuts during the Federal Reserve's new easing cycle.
December gold futures last traded at $2,640 an ounce, up 27% year-to-date. As for what could push gold back to the 30% level, Shiels noted that 10% of the market is driven by unknown demand in opaque over-the-counter (OTC) markets and unreported central bank demand.
“OTC/unknown physical flows are driving price action more so now in this wartime economy than before. It also explains why ranges are wider and price action more volatile given less visibility,” she said in the note. “There is 10% of unexplained gold price action. That rests on retail and other physical trading hubs, from the Middle East to India & China, which are consistently accumulating (though the Chinese market has softened recently, with SGE at ~$30 discount). Bears will say gold is overshot, but bulls argue there’s a lot of other OTC investment buying beyond central banks driving prices, and it’s sticky buying.”
Although OTC demand remains an unknown factor, Shiels also noted that there are growing indications in known markets pointing to further consolidation in the near term, as long-term bullish support holds.
Shiels observed that while speculative bullish positioning appears to be overextended, creating some froth in the marketplace, there is still plenty of room for growth when measured against historical standards. She said that the market’s speculative positioning is only about one-third of its historical potential.
“Investors (COT + ETF) currently own 108 million ounces of gold, below past price peaks (COVID/2020, Russian invasion, US Banking Crisis & Dec 4th ’23 peaks); current holdings are lighter by 5 million ounces compared to past price peaks (largely due to ETFs remaining underweight rather than fast money/COT underweight). Year-to-date, investors have added 9.3 million ounces; on an annualized basis (~11.2 million), these inflows match the 2020 inflows but are nowhere near the large yearly inflows seen in 2019 (+38 million ounces) and 2009 (+33 million ounces),” she said. “Not to mention, on a relative basis and given the massive liquidity still in the system (in an easing cycle!), generalist exposure to gold is very underweight.”
She maintained her position that, in this environment, dips should continue to be bought.
At the same time, she noted that central bank demand continues to support gold prices, even if official purchases have slowed in the second half of the year.
“Overall, the reduced pace of central bank buying in 2024 is not enough to spook markets, but it is enough for gold to remain flattish around $2,600 since August,” she said.
Looking at gold’s broader picture, Shiels noted that the gold trade is far from crowded, which means prices are far from peaking.
