Daniel Ghali, a commodities analyst at TD Securities, highlights the growing likelihood of a direct military confrontation between Iran and Israel as a driving factor for the influx of safe-haven investments into gold. Despite the market indicating overbought conditions and dwindling Asian demand, these geopolitical tensions are pushing investors towards the precious metal.
Ghali notes that while gold selling activities are limited, top traders closed nearly 5 tons of nominal gold contracts last week. This contrasts with Western investors, whose gold positions are at their highest since the Brexit referendum in July 2016. Support from risk parity and volatility target funds has benefited CTA (Commodity Trading Advisors) accumulation, contributing to the rising gold prices.
Ghali explains that concerns over inflation and currency depreciation are driving the interest from the U.S. and Europe. There's a growing apprehension among Western investors about asymmetric responses from the Federal Reserve, despite the U.S. economy performing well by many indicators. He anticipates cautious normalization of monetary policy to challenge overextended positions, especially given the current positive expectations for global easing policies.
According to Ghali, the outlook on currency inflation has historically supported gold prices. However, the actual prices have reached unprecedented levels since the 1980s. Extreme macro fund positioning, slowing central bank purchases, and renewed Asian confidence might weaken the primary drivers of gold demand. In the short term, the potential for direct conflict between Iran and Israel continues to attract capital to gold.
Earlier this month, Ghali warned that key indicators suggest an overbought condition in the gold market, predicting that prices could drop by $200 per ounce or more. He believes there's a risk at the $2,500 level, indicating a significant shift from a few months ago. He also pointed out a historical mismatch between fund managers' gold positions and market interest rate expectations, which could trigger a rebound.
Since then, the gold market has seen significant changes. Fund managers' positions have expanded to historical highs, comparable to periods around the Brexit referendum, the stealth quantitative easing in 2019, and the peak of the COVID-19 crisis in March 2020. Ghali suggests that many bullish sentiments are already factored into the market.
Ghali also mentions a stark difference between the current spot market and a few months ago, noting a buyer strike in Asia. He advises caution as most buying activities might be related to currency depreciation hedging. Today's market pricing suggests a notably different outlook, emphasizing the capital movement from less productive areas to more productive ones, which may not align with current gold prices.
Regarding future buying opportunities, Ghali targets a significant drop from current levels, suggesting that a price near $2,300 is reasonable based on historical parallels. He believes that tightly positioned markets like today can lead to a 7% to 10% decline, making $2,300 a plausible target.
During early U.S. trading, spot gold dropped to a low of $2,643.81 per ounce before beginning to rebound. Currently, spot gold is trading at $2,649.68 per ounce, down 0.51%.
