Gold is on track to gain over 7.5% in March, marking its best monthly performance since November, the price also reached $2000 per ounce for the first time since Russia’s initial invasion of Ukraine. While the precious metal has eased back since then, flows, options contracts and the COT report suggest that there could be more upside.
What is driving gold demand?
Gold was a clear winner from the recent banking sector turmoil, prices rose to a 12-month high amid a surge in investor demand for a haven outside of cash and bank accounts, fuelled by the global banking crisis. The appeal of gold has been twofold:
Haven flowsGold is a traditional safe haven asset that attracts buyers during economic, financial or geopolitical uncertainty. Moreover, investors worried that their money wouldn’t be safe in banks magnifying Gold’s haven status.
Lower bond yieldsFrom a longer-term perspective, investors bet that the Federal Reserve could start cutting rates, in stark contrast to the Fed’s own projections and communication. Fears of a full-blown banking crisis putting brakes on Fed rate hikes drove demand for gold while pulling treasury yields and the USD lower. The market ignored Federal Reserve Chair Jerome Powell, who has been clear that he expects to hold rates unchanged through the rest of 2023.
Interestingly, Gold advanced even when the Fed hiked rates by 25 basis points to 4.75%-5%, which investors believe could be the peak. According to the CME Fedwatch tool, the market is pricing in a 62% probability that the Fed will keep rates on hold in the May meeting and are pricing in two rate cuts by the end of the year. Lower interest rates reduce the opportunity cost of holding non-yielding assets such as gold. So, if we are at the end of the hiking cycle for the Fed, then there is scope for more gains in Gold.
Flows into gold
Highlighting the elevated level of interest in the precious metal, March is on track to be the first month of net inflows into gold ETFs for 10 months. Bullish option bets on SPDR Gold Trust ETF have risen fivefold since the beginning of March.
Another telling ratio, that of calls to puts, has also swung to an extreme level which could suggest that traders believe that prices could rise further.
Source: Financial Times
A similar trend could be seen in the CME’s futures and options tied to those futures with a jump in interest in so-called “out of the money” options which pay out only if gold hits a new all-time high.
Gold commitment of traders (COT) report
Gold data from the Commodity Futures Trading Commission (CFTC) from March 7th -21st shows traders shifting into long positions. Longs added 67 tonnes to 389 tonnes. In the same period shorts, more than halved to 136 tonnes from 227. The resultant net long position jumped from long 45 tonnes to 253 tonnes, marking the highest level since the end of January, well above the 12-month average of 113 tonnes.
Unsurprisingly the COT gold report showed that traders have become increasingly bullish on the gold futures. Large speculators (green) increased net long exposure for a third straight week to an almost 2-month high. Small speculators (blue) have increased net long exposure. There is still some catchup to rise back to January ‘22 levels of bullishness which could imply further upside.
Gold mining stocks too
With gold prices expected to push over $2000, this could be an opportunity in the mining sector, which has been lagging behind the precious metal since the start of the year. With Gold prices rising, energy prices falling, and miners trading at low valuations, this could be a win-win.
Prominent gold miners, including Barrick Gold (GOLD), Newmont Mining (NEW) and Rio Tinto (RIO) could all be beneficiaries of a sustainable uptrend in the gold price.
Risks factors for gold
While there appears to be evidence supporting further upside for gold, as always, there are risks to the bullish trade. As banking sector fears fade and attention swings back to inflation, Treasury yields are climbing. Hawkish Fed bets could rise again, particularly in light of recent stronger-than-expected US consumer confidence data.
Attention will now be on Friday’s core PCE data; if the Fed’s preferred inflation gauge cools further, Gold bulls could take another leg higher. However, a rise in inflation could revive gold bears.
Gold technical analysis
Gold rebounded off the multi-week rising trendline at 1835 on March 9, rebounding above the 50 SMA and rising sharply into resistance at 2009 on March 20. From here, the price has eased slightly and is testing support at 1960, the February high. The RSI keeps buyers hopeful of further gains while it remains out of overbought territory.
Should buyers successfully defend 1960, bulls could test 2000 and 2010 to create a higher high. A break below 1960 could see sellers test 1944, the weekly low and 1934, the March 22 low.