(Kitco News) - Gold’s juggernaut rally has pushed prices into overbought territory, but one analyst notes that the market’s momentum makes $4,000 an ounce an achievable target.
According to momentum indicators, gold’s latest rally toward $3,800 an ounce has pushed the precious metal into significantly overbought territory. However, in a research note published at the start of the week, Mike McGlone, Senior Commodity Strategist at Bloomberg Intelligence, noted that speculative positioning in the gold market is still not significantly overstretched.
“In a raging bull market like gold's, managed money (hedge fund) net-longs typically get stretched, but they aren't,” he said.
Looking at trade data from the Commodity Futures Trading Commission, McGlone noted that gold investors are net long 16 million ounces, which is below last year’s peak of 25.5 million ounces.
At the same time, he noted that demand in gold-backed exchange-traded funds has jumped to a three-year high. Last week, the world’s biggest gold-backed ETF, SPDR Gold Shares (NYSE: GLD), saw its largest single-day inflows on record with more than 18 tonnes. Despite the renewed investment demand, gold holdings in global ETFs are still well below the record levels set in 2020.
“Gold prices are surging, but ETF and futures positions remain well below stretched long levels that typically augur elevated sell-stop reversion risks,” he said. “From a base of 100 at the end of 2008, the gold price is up almost 320% to Sept. 12, while ETF holdings have increased about 150%. Until the start of 2024, gold ETF holdings mostly tracked ahead of the price.”
Although gold is on track to hit $4,000 an ounce sooner rather than later, McGlone also said that a new catalyst might be needed. He said that a correction in record-high equity markets could be the next catalyst to drive the precious metal higher. He added that gold’s rally could be signaling a sharper correction in global financial markets.
McGlone noted that gold’s push above $3,700 has driven the price 70% above its 60-month moving average, a scenario the market hasn’t seen since 2011, when gold was making its initial drive to all-time highs near $2,000 an ounce.
Despite these unprecedented conditions, McGlone said there is room for gold to move higher.
“At 0.56, gold/SPX is below the high of 0.69 in 1Q20. For gold to reach $4,000, the ratio might need to rise, implying underperforming equities,” he said. “Gold appears to be on track for its next round-number resistance at $4,000. What might prevent the move may be less important than what could fuel it: the stock market. If stocks hold up, gold may face headwinds, as the metal's record run might be signaling a recession-related decline in equity prices. The unconventional nuances of the Trump administration are underpinning the metal,” he said.
While a correction in equity markets is expected to provide some support for gold, McGlone is not as optimistic on silver, as he expects it to lag the yellow metal in a potential recession.
Robust momentum in silver has pushed prices to fresh 14-year highs above $44 an ounce; however, gold’s rally means that the gold/silver ratio has remained elevated above 85 points.
“Currently at 85, the gold/silver cross is well supported near 80 but risks revisiting 100, particularly if the stock market falters,” said McGlone. “Was the first-half spurt to 100 a false alarm or a warning of a global economic slowdown? We lean to the latter. Historically, recessions often follow soon after the Federal Reserve begins easing cycles, and the current cycle resumed Sept. 17.”
