(Kitco News) – Even as central bank buying appears to be easing, uncertainty surrounding the upcoming U.S. election will likely keep investors from selling their gold, and a disputed outcome could extend and magnify the yellow metal’s safe-haven bid, according to TD Securities’ Senior Commodity Strategist Daniel Ghali.
In an interview on Monday, Ghali said even as some of the drivers in the gold market are shifting, there’s still plenty of room for allocations to grow, and geopolitical uncertainty in the United States and abroad will put a firm floor beneath record-high prices.
“In a medium-term outlook, what's interesting about the ongoing rally in gold is that really anywhere you look, you can't find much evidence of substantial inflows heading into gold,” Ghali said. “Some of the largest gold investors, according to our analytics, are holding on to an extreme amount of gold relative to history. Elsewhere, physical markets have actually come to a standstill. I think what the gold market is actually telling us is that there is a lot of anxiety surrounding the upcoming U.S. election season.”
“Perhaps it's not a story of a substantial amount heading into gold,” he added, “but rather a story that it takes a brave soul to sell gold into this specific election.”
Ghali agreed that market participants are reluctant to sell in an environment with such strong upward momentum, and pointed to various factors supporting the yellow metal at record highs.
“There's a lot of reasons to buy gold,” he told Bloomberg. “Geopolitical uncertainty, particularly in the Middle East, is probably at its highest levels since the Gulf War. The Fed has just entered into an easing cycle… to be clear, historically this has been associated with good returns in gold on several months’ basis, but at the same time there is a lot of evidence that investors have actually front-run all of this and have positioned themselves already for the ongoing outlook.”
Central banks have been a key component of gold’s record-setting price rally, Ghali said, but the strength of the trend is now hotly debated.
“According to the official data, central bank buying activity on a six-month moving average basis has actually trended closer to its five-year lows, so a lot of the stories that you hear in gold markets are actually in flux,” he said. “Yet we're not seeing the selling activity that you would typically anticipate as a result of these, potentially because of the U.S. election season.”
Ghali was asked if he sees potential for the sovereign buying trend to reverse altogether, and what the impact on gold prices would be if central banks switched to being sellers.
“I think central banks are going to buy gold for the foreseeable future,” he replied. “Emerging market central banks are under-owning gold at the moment, so there's a long way to go before they reach levels that are comparable to the West. That being said, this is actually a structural shift that started sometime in 2019. The war in Ukraine certainly accelerated that trend, but this isn't necessarily the driver that's going to continue to lead to further gains in gold. In fact, they don't necessarily have a rush to buy gold in the same way that investors might have.”
“I think the story, when it comes to gold prices, central banks are important to that story, but they're not the entire story.”
Ghali was also asked for his outlook on the U.S. election, and what gold might do if the results of the vote are unresolved or disputed in the days after Nov. 5.
“We can certainly expect a significant amount of volatility,” he said. “A lot of that suggests that gold prices might trade higher on that uncertainty, certainly a big contingent of the speculative community that looks at gold isn't going to be willing to sell gold in that environment, so even though other factors might be trending in that direction, whether a Trump presidency could mean higher inflation on the horizon, a rethink of the Fed outlook as a result of that. But if the U.S. election is contested, that will delay these sales.”
“The question I have on top of my mind is, is that going to create pent-up demand to sell gold after the election season?” Ghali concluded. “That remains to be seen.”
