Precious metals: Gold’s period of rangebound trading around $1700/oz extended into a ninth week as the metal struggled to find a theme strong enough to take it higher, or lower. The lack of positive response to additional central bank stimulus, the recent dollar weakness and lower real yields have all helped drive a reduction in speculative longs held by hedge funds in the futures market. Since the February peak they have cut bullish bets by 55% to the lowest in a year.
Bullion-backed exchange-traded funds, meanwhile, have continued to go from strength to strength with total holdings according to Bloomberg data having risen by 565 tons to 3138 tons so far this year. Thereby, more than off-setting the pandemic and lockdown-related drop in physical demand from the world’s biggest gold consumers in Asia.
Rising demand for ETF’s have come from all types of investors from retail to pension funds and some of the world’s ultra-rich. Nine private banks interviewed by Reuters, which collectively oversee around $6 trillion in assets for the world’s ultra-rich, said they had all advised clients to increase their allocation to gold.
Two of several reasons we have mentioned these past few months for maintaining a bullish outlook, debasement concerns and lower real yields, were highlighted in the latest note from Goldman Sachs. In it they raised their six-month price forecasts for gold to $1900/oz and not least silver to $21/oz. The latter representing a gold-silver ratio at 90.5, a 9% outperformance relative to the current market.
Recent price action in precious metals highlights their ability to frustrate and the need to be patient. The trigger that’s needed to propel the market higher is currently missing given the risk-on and optimism seen across financial markets. These developments, however, do not change our view that gold will act as an important diversifier in the short-term, while in the long-term it is likely to prosper as the dollar weakens and real yields move lower as inflation rise.
Adding to this are increased geo-political risks, potentially fueled by COVID-19 blame game, especially with polls pointing to a significant defeat for President Trump this November. Furthermore, the pandemic risks speeding up the deglobalization and reshoring process that started with the U.S.-China trade war.