Gold shines as investors turn more defensive

1) Gold’s credentials as an inflation hedge as well as a defensive asset have received renewed attention with rising stock market volatility amid a market adjusting to a rising interest rate environment. At the same time, we believe inflation will remain elevated with rising input costs and rising wages being two components that will not be lowered by rising interest rates.

2) Gold has during the past month been exhibiting rising immunity towards rising real yields (chart above) with investors instead focusing on hedging their portfolios against the risk of slowing growth and with that falling stock market valuations. Even more aggressive rate hikes may end up being positive for gold as it will further raise the risk of a policy mistake from the Federal Reserve as it increases recessionary risks. During the past week total holdings in ETF’s backed by bullion jumped the most since September 2020 to a three-month high at 3083 tons.

3) During the past month, the commodity sector has continued to show strength with the risk off across other asset classes having a limited impact. This highlights the strong fundamentals underpinning many individual commodities where several will be facing a prolonged period of a mismatch between rising demand and inelastic supply. With some of the worlds most tracked commodity indexes holding between 5 and 15% of their exposure in gold, any demand for these will automatically generate additional demand for gold.

4) While asset managers as seen in the ETF chart above are showing signs of renewed appetite, the price action has yet to trigger any increased interest from leveraged money managers who often focus more on momentum than fundamentals. In the week to January 18, they held a net long in COMEX gold futures of just 84,539 lots, some 71% below the record peak from 2019. In order to attract demand from this investor segment, gold as a minimum need to break above the 50% retracement of the 2020 to 2021 correction at $1877 which is also the 2021 high. For the bullish outlook to be maintained gold needs to hold above its 200-day moving average, currently at $1805, while a break below $1790 may signal a deeper correction.