What can Q4, banking concerns bring about to gold’s rally?

At the time of writing, the price of gold is $1964.27 per ounce, up +0.77 cents and +0.04% from Tuesday’s closing price. For the first time since Russia’s invasion of Ukraine, the price of the precious metal has now surpassed $2,000 per ounce. Gold prices have reached $2,000 per ounce for the first time in a year due to upheaval in the banking sector and concerns about both the US and European economies.

A recent intraday high of $2,014.90 was reached by the most commonly traded gold futures contract, which has increased by almost 8% to $1,984.50 this month. This is on pace to be the greatest monthly percentage increase since July 2020. Since Russia’s invasion of Ukraine in the spring of last year, prices had not exceeded $2,000.

Observers predict that if speculators increase their exposure and the Federal Reserve lowers interest rates, gold could average $2,000 an ounce in the fourth quarter of this year. Following a significant run over the last three weeks, a decline in gold prices is unavoidable. Yet, there is enough potential for price growth in the second part of the year.

While analysts anticipate a short-term decline in prices, they anticipate a rise in spot gold prices over the course of 2H23 and a 4Q23 average price of US$2,000/oz. The underlying assumptions are that the banking sector will not continue to deteriorate and that the Fed will begin lowering interest rates before the year’s end.

According to CFTC data, traders have increased their net long position in COMEX gold recently. Since late February, the managed money net long has grown by 67,047 lots to a total of 106,955 lots. On the assumption that the Fed is not too far from the peak fed funds rate, speculators already strengthened positioning near the close of last year and the beginning of this year.

But more speculative positions are still possible. Furthermore, lingering worries about the banking industry and a Fed turn would be the ideal triggers. A few indicators suggest that investors are expanding their exposure to gold. The current net long is marginally lower than levels observed in January of this year, significantly lower than levels observed at the outbreak of the Russia/Ukraine war, significantly lower than levels observed during the peak of the Covid lockdown period, and lower than the record net long of about 292k lots observed back in September 2019.

Moreover, around 22% of open interest in COMEX gold is currently held by net speculators. Spec length for gold has already reached up to 50% of open interest. However, the long/short ratio for COMEX gold speculators is at 3.72, which is far lower than the record of over 90 recorded at the height of Covid lockdowns.

After huge outflows last year, the gold-backed ETF patterns are currently turning around. ETF net purchases during the last two weeks totaled 36 tonnes.

Central bank gold purchases will continue to be a factor this year due to geopolitical unpredictability and the state of the economy. Robust purchasing has continued into 2023, with Turkey and China each acquiring 23 and 15 tonnes in January 2023, respectively.

Several economists also predict that the banking issue will be contained, that the economy will slow, that inflation will decline, and that the Fed will be content with the current rate hikes. Over the medium term, Fed policy is probably going to be crucial for gold. The Fed funds rate is probably about to peak, and analysts anticipate a change in direction in the second half of this year. These developments point to a tightening of credit flows, which will weigh on the economy and cause inflation to decline even more quickly.

Although expecting rate decreases in the second half of the year, the Dutch bank does not completely rule out another 25-basis-point rate increase in May. In Q4, we anticipate a 75 bp reduction from the Fed. Later in the year, economists anticipate real yields to follow policy rates lower, which should be positive for gold prices.