(Kitco News) - Gold has managed to hold solid gains above $5,000 an ounce, but one market analyst sees short-term tactical risks in the marketplace as it tries to find some balance after last month’s unprecedented selloff.
In her latest note, Roukaya Ibrahim, chief strategist at BCA Research, said she remains bullish on gold but warns investors to prepare for more short-term volatility and another “meaningful pullback” in prices.
Despite the risks of lower prices in the next few months, Ibrahim said that BCA is sticking with its longer-term long gold positions, first recommended in November 2022.
The Montreal-based research firm sees further value in being long gold/short copper, long gold/short global equities, and long gold miners/short global equities.
“We doubt that gold’s January high marks the peak in the structural bull market. Nevertheless, downside risks linger in the near term. Therefore, the yellow metal’s price could face headwinds over the coming months before restarting its ascent,” Ibrahim said in her report.
Although gold’s biggest selloff in decades has spooked many investors, Ibrahim said the price action is not surprising given the rally of the last few months. She added that the current volatility is consistent with previous cycles.
However, she also noted that despite the sharp correction, broad market fundamentals haven’t changed. Still, it could take a while before investors find solid price footing again.
“The duration of selloffs during past structural bull market corrections has lasted anywhere from 13 days to just under six months. Moreover, it has taken anywhere from one month to nearly a year for prices to retrace their prior highs,” she said.
Ibrahim explained that speculative momentum remains the biggest near-term risk for gold. She pointed out that gold’s near-parabolic rally has been driven by inflows into gold-backed exchange-traded funds (ETFs). At the same time, a significant portion of that demand has come from Asian investors.
“Given that Asian investors are very momentum-driven and price-sensitive, a correction could trigger an unwinding of their positions and produce a meaningful price drawdown in the near term,” she said. “Increased Chinese investment demand over the past year — which is likely speculative in nature — will create price volatility over the coming months. These speculative flows can reverse just as abruptly as they have surged.”
While gold’s price action will be sensitive to shifting investor sentiment, Ibrahim said there is still one solid pillar of strength in the marketplace.
“Private investors are likely to inject volatility into gold prices over the near term. However, they are likely to remain a tailwind over a cyclical timeframe. Meanwhile, continued central bank buying will help put a floor under the market,” she said.
With rising geopolitical uncertainty and growing government debt, Ibrahim said it is unlikely central banks have stopped buying gold, even if purchases slow compared to the momentum seen in the last three years.
“Central bank gold purchases are price-sensitive in the short term, slowing the pace of demand as prices spike. However, they are price-insensitive over the long term as they continue reducing their exposure to USD-denominated reserves. Thus, while these purchases will propel prices higher over a structural timeframe, they will not prevent a gold selloff in the near term,” she said.
As they do in the retail investment market, China will continue to play a dominant role in the official sector, Ibrahim said. She pointed out that even as the People’s Bank of China has significantly increased its official reserves in the last three years, its gold holdings are still relatively low.
With less than 9% of its foreign reserves in gold, Ibrahim noted that its holdings represent a much smaller share of its overall reserves compared to other emerging economies.
“If the PBOC were to boost this share to the EM average of 18%, it would need to buy roughly another 60 tonnes of the metal (assuming the gold price remains constant and the value of total reserves remains unchanged),” she said. “These quarterly purchases would be nearly 2.5 times above the PBOC's average gold purchases since the start of 2023.”
