Metals Focus, one of the world’s leading precious metals consultancies, has published its Precious Metals Investment Focus, which contains some very interesting observations on the direction precious metals markets are taking at the moment. Over the next few weeks I’ll be dipping into the key markets they follow, for interesting intel for commodities traders.
This week we start with gold. The yellow metal has obviously seen a remarkable rally over the last 12 months, with seemingly no end in sight at the moment. It has surged by around 30% this year.
US economy continues to be a key factor
Gold’s performance has been driven by several factors, including expectations of Fed rate cuts, periods of dollar weakness and falling yields, and geopolitical risks, with strong central bank buying providing additional support. Gold has also benefited from longer-term investors’ interest in portfolio diversification, often in response to concerns that equities are unsettlingly overpriced or the sustainability of US government debt.
While some of these factors have characterised gold’s price strength for much of the last two years, signs of easing inflation in the US and a weakening labour market cemented confidence about rate cuts from the middle of this year and added fuel to the price rally. Importantly, the Fed might have continued to emphasise a gradual approach to policy easing for most of last year and H1.24 but financial markets continued to price in more aggressive interest rate cuts. Even if the speed of cuts was slower than many anticipated, investors remained firm in their belief that cuts were coming which in turn drove many of them towards gold.
Institutional investors are back in the gold game
This year saw the many institutional investors who had been all but absent for much of last year return to gold from March/April. A turnaround was seen at that time for the dollar and US yields, with falls for both from April onwards assisting gold. Anecdotally, Metals Focus understands that CTA inflows started the charge upwards and were later joined by macro funds in anticipation of a more favourable macroeconomic backdrop when the easing cycle begins. It is also worth noting that some investors that had missed the earlier rally were often keen to buy any notable corrections.
Gross shorts, meanwhile, remained suppressed for the most part. All this helped limit the downside, for instance in the wake of the overspill from August’s equity market turbulence. Evidence for this swing over the year can be seen in the ETPs (which in the early months had seen net withdrawals) while the LBMA trading volumes grow by 9% y/y through to end-August, with July the busiest month.
Unusual behaviour in physical gold
The physical markets’ reaction to the price gains this year have also been unusual. For instance, western retail investors (who typically buy into rallies) have sold into this move, while in Asian markets (where investors are more likely to hold back or even sell), physical investment has grown, particularly in India and China. Profit taking and recycling in Asia have also been limited compared to previous bull markets. Furthermore, official sector purchases have remained strong and played a role in providing a floor to prices, even when liquidations emerged elsewhere.
Portfolio diversification among big investors
With the Fed embarking on its rate cutting cycle in September, Metals Focus expects gold to remain supported by expectations of further easing combined with worries about US debt and ongoing geopolitical tensions. This is implicit in Metals Focus’ market balance which is expected to widen further this year – this can act as a proxy for net investment by institutional players. This also fits with the ongoing story of portfolio diversification for those with a longer-term outlook. It is even possible that retail investment inches higher next year, as the trend followers outweigh the profit takers.