Gold soars as Fed folds on inflation

In this week’s [18 to 22 March week] market update by ABC Bullion,

1: Gold prices traded above USD $2,200 and AUD $3,300 per troy ounce (oz) earlier this week, as a dovish US Federal Reserve fuelled the recent precious metal rally. 2: Last trading at USD $2,180oz, gold has since eased from the intra-week high, though is still +1% over the past five trading days.

Silver failed to follow gold higher this week, with the precious metal -1% in USD terms, last trading at USD $24.70oz, with the gold to silver ratio (GSR) rising to 88. Foreign exchange markets were again relatively calm, with the USD index rising by 1%, while equity markets rallied, with the S&P 500 +2% over the week. Bitcoin fell 7% and is back below USD $65,000.

Fixed income markets were also calm, with yields on 10-year government bonds in both the United States and Australia still sitting above 4%.

Here point is at the weekend, how much higher for gold? And ABC Bullion said, gold prices briefly surged beyond USD $2,200 oz this week, as the US Federal Reserve reaffirmed expectations it will deliver at least three interest rate cuts in 2024, despite consumer price inflation rates that are failing to come down as fast as the central bank would like.

While gold has since given back some of those gains, the price action remains constructive, with investors adding to positions in this recent rally. That includes the more speculative end of the market, with managed money speculators increasing their long positioning by more than 70,000 contracts (or 70%) since late February.

In the same time period, managed money speculators that were short gold more than halved their positions since mid-February. The activity of these investors represents a more than USD $20bn change in the gold market, which combined with continued buying from retail investors and a return to inflows from gold ETFs, is largely responsible for the recent surge in bullion prices.

And while the speed of the recent price rally does leave gold susceptible to profit taking, the long-term outlook remains bullish, especially as the appetite for precious metals amongst the wider investment community remains lukewarm at best.

This was best summed up in a Financial Post article from March 21st that ran with the headline “Wow, nobody wants to buy us’: Investors exit as gold price surge”, with Shree Kargutkar of Sprott Asset Management noting that “the sentiment in this space has never been lower.”

If gold were indeed to top out at USD $2,200oz, it would be the first bull market to end with sentiment and financial market headlines of such nature. More importantly, the case for holding gold in a diversified portfolio remains as strong as ever given the geopolitical and market environment all investors are navigating today, with Swiss Private Bank Lombard Odier releasing an update on the gold market this week which noted that they are maintaining their “strategic level of exposure to the precious metal in portfolios.”

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