Gold stabilising ahead of support

Hedge funds were aggressive buyers of COMEX gold futures during a two-week period up until last Tuesday, November 15. During this time they bought 80,000 contracts or 8 million ounces, the strongest two-week buying pace since June 2019. As a result the net positions flipped from a short to 41k contract net long, a three-month high. However, the failure to break above key resistance in the $1800 area has left the metal exposed to a setback, hence the renewed focus on resistance-turned-support at $1735. 

One of the reasons why gold did not break higher last week was the continued absence of longer-term focused buyers through bullion-backed ETFs. Since the November 3 low and later rally, total holdings have seen a 210,000 ounce decline to the current 94.2 million ounces, thereby extending an almost non-stop pace of reductions since April. With ETF investors still sitting on the fence, another key source of support appeared during the third quarter from central banks. The Gold Demand Trends Q3 2022 update from the World Gold Council out earlier this month showed central bank demand reached a quarterly record of nearly 12.9 million ounces, thereby offsetting a 7.3 million ounce outflow from bullion-backed ETFs. 

At Saxo, we maintain a long-held view that the inflation outlook will likely surprise to the upside with a 4% to 5% range over the next decade not being that outrageous. Driven by a new geopolitical situation where the world is splitting into two parts with everything evolving around deglobalization driven by the need for self-reliance. Together with the energy transition, we are facing a decade that will be commodity and capital intensive, and where scarcity of raw materials and labor will keep inflation elevated for longer and higher than the 2.6% level currently being priced in through the swaps market. 

Such a scenario combined with the risk of an economic slowdown forcing a roll over in central bank rate hike expectations, sending real yields and the dollar lower, may in our opinion create powerful tailwinds for gold and silver during 2023. 

Having failed to break resistance at $1789, the 38.2% retracement of the 2022 selloff, the recent bounce can still only be described as a weak correction within a downtrend, and for that to change the break above is needed. In the short term the focus stays on $1735 support and the markets ability to attract fresh buying interest. Failure to do so would likely trigger more selling, initially to $1722 and potentially as deep as $1700.