Head of Commodity Strategy
Summary: Gold has just reached a fresh record high, and while some may feel this is too much too soon, the prospect of future US interest rate cuts potentially starting a second leg higher can not be ruled out. Rate cuts when they occur, may drive investors back into ETF's, an asset class that has seen significant outflows since 2022 when the US Federal Reserve embarked on its aggressive rate hike campaign. In addition sustained central bank and retail demand for physical gold, and ongoing geopolitical uncertainty are likely to continue providing underlying support to prices. In this note we take a closer look at the many different ways traders and investors can gain exposure, while also highlighting the main drivers that often dictate the direction.
After a remarkably resilient February, during which gold managed to hold steady despite headwinds from a strengthening dollar, rising bond yields, and tempered rate cut expectations, the yellow metal has surged higher with XAUUSD reaching a fresh record high above USD 2140. Despite its current lofty levels, which some may feel is too much too soon, the prospect of future US interest rate cuts potentially starting a second leg higher can not be ruled out. Rate cuts when they occur, may drive investors back into ETF's, an asset class that has seen significant selling since 2022 when the US Federal Reserve embarked on its aggressive rate hike campaign. In addition sustained central bank and retail demand for physical gold, and ongoing geopolitical uncertainty are likely to continue providing underlying support to prices.
Physical gold: Purchasing physical gold in the form of jewellery, coins, or bars provides direct exposure to the metal but involves considerations such as secure storage, insurance, and higher trading costs.
Gold ETFs/ETCs: Exchange-traded funds or commodities offer a convenient way to invest in gold without holding physical metal. These products track gold prices closely and can be traded easily on exchanges.
Gold mining stocks/ETFs: Investing in gold mining companies or ETFs that hold a basket of mining stocks provides exposure to gold prices. However, these investments carry operational risks and may exhibit higher volatility compared to gold itself. Since 2022, when the US Federal Reserve began hiking rates to curb soaring inflation, gold miners have struggled relative to the price of gold amid rising costs towards financing, labour, and materials. The weakness seen during the past few months has left the sector increasingly undervalued relative to the gold prices hitting fresh record closing highs.
Gold futures, CFDs, and options: Trading gold futures, contracts for difference (CFDs), or options involves higher risk due to leverage. While these products offer opportunities for speculation, they also require careful risk management to mitigate potential losses.
The COMEX gold futures has a contract size of 100 troy ounces, and with a current price around USD 2,100 per ounce, a contract value of USD 210,000. Being a leveraged product, the buyer or seller of a futures contract has to provide less than USD 10,000 as collateral, leaving the owner of the position highly exposed to losses without proper risk management. CFDs track the futures price with the main difference being the ability to trade smaller quantities than the 100-ounce futures contract.
Spot gold trading: another leveraged product that may suit traders using risk management tools while long-term investors may find ETFs being the better option. At Saxo you can use leverage to trade on the price of gold against 12 different currencies – including US dollar, euro, yuan and Swiss Franc – and silver.
Monetary policy: The policies of the US Federal Reserve, including interest rates and inflation targets, significantly influence gold prices. As gold does not yield interest, rising interest rates increase the opportunity cost of holding gold, often leading asset managers to reduce their exposure to real assets.
Currency fluctuations: Gold prices typically exhibit an inverse relationship with the value of the US dollar. A weaker dollar tends to drive gold prices higher, and conversely, a stronger dollar can suppress gold prices.
Real bond yields: Gold prices often move inversely to interest rates, as rising rates increase the opportunity cost of holding non-interest-bearing assets like gold. Long-term investors monitor developments in US real yields, which represent the yield on a bond investment adjusted for expected inflation.
Central bank demand: Several central banks have been acquiring gold in recent years to diversify their reserves away from heavy reliance on the dollar. Additionally, gold's lack of credit or counterpart risk makes it a trusted reserve asset globally.
Geopolitical tensions: Gold is considered a safe-haven asset, sought by investors during times of geopolitical uncertainty or crisis due to its intrinsic value and perceived stability.
Speculative activity: Hedge funds and speculators often anticipate and amplify price movements in gold markets based on fundamental and momentum-driven factors.
Commodity articles:
6 Mch 2024: Video: What happened to the gold prices?
1 Mch 2024: Grains dip, cocoa soars, gold and oil see rays of strength: February’s commodity mix
29 Feb 2024: Podcast: Why speculative interest is important to understand
28 Feb 2024: Oil price stuck in neutral despite underlying strength
27 Feb 2024: Resilient gold market defies lower rate cut predictions
22 Feb 2024: Copper short squeeze fades ahead of key resistance
21 Feb 2024: Gold's resilience despite recent futures and ETF selling
20 Feb 2024: WTI crude eyes resistance amid improved signals
16 Feb 2024: Commodity weekly: Grains tumble; Industrial metals eye China boost
15 Feb 2024: US rate cut delay drives gold below $2000
13 Feb 2024: Video: What is driving Cocoa's sweet price
9 Feb 2024: Commodity weekly: Refined product strength lifts crude
9 Feb 2024: Podcast: Year of the metals
7 Feb 2024: Crude oil supported by tightening fuel outlook
6 Feb 2024: Gold and silver turn defensive on reduced Fed rate-cut optimism
2 Feb 2024: Commodity weekly: Tight supply adds fuel to uranium and cocoa rally
1 Feb 2024: Commodities: January performance and ETF flows
Previous "Commitment of Traders" articles
4 Mch 2024: COT: Underinvested speculators fuel gold's latest surge
26 Feb 2024: COT: Record corn short, cocoa surge no longer supported by speculators
19 Feb 2024: COT: US inflation surprise drives broad selling of metals
5 Feb 2024:COT: Speculators chase false crude break; grain short extends further
29 Jan 2024: COT: Squeeze risks after funds sold into rising commodity markets
22 Jan 2024:COT: Commodities short-selling on the rise amid China woes and Fed caution
15 Jan 2024:COT: Grains sector slump continues; Mideast risks lift crude demand
8 Jan 2024:COT: Weakest commodities conviction since 2015
2024: The wasted year
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As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
