Gold's record rally gets added jolt from Fed rate cut. Is there anyone left to buy?

By William Watts

Market may see a 'tiring' of what's been 'near-rapacious' investor demand, one analyst says

Gold's relentless rally got an added jolt this week from the Federal Reserve's long-awaited interest-rate cut, but some analysts are beginning to wonder if the pool of potential buyers could begin to run dry.

Gold futures (GC00) added to their gains even as Treasury yields BX:TMUBMUSD10Y and the U.S. dollar DXY strengthened, possibly a sign that forced liquidation of remaining short positions - bets on gold prices to fall - were being shaken out of the market, said Alex Kuptsikevich, senior market analyst at FxPro, in a note.

Gold for December delivery (GCZ24), the most actively traded contract, rose $31.60, or 1.2%, on Friday to finish at a record $2,646.20 on Comex. Gold is up 27.7% this year to date and has rallied 36% over the last 12 months.

"The forced liquidation of short positions may push the gold price higher into historical highs, as the U.S. dollar generally holds its ground against a basket of major currencies, and rising bond yields create an unfavourable environment for gold," Kuptsikevich wrote.

A rising dollar is typically seen as a weight on gold and other commodities priced in the unit because it makes them more expensive to users of other currencies. Higher bond yields, meanwhile, raise the opportunity cost of holding nonyielding assets like gold. Treasury yields have backed up somewhat this week, but have dropped significantly in September in anticipation of the rate cut delivered by the Fed on Wednesday.

Veteran gold analyst James Steel, chief precious-metals analyst at HSBC, observed that much of the recent buying in gold was driven by technical and momentum considerations.

"We may see some tiring in what has been up until now near-rapacious investor demand," Steel said. He noted that "this level of demand is not reciprocated in the physical markets," with jewelry demand, in particular, not strong while Western coin and bar demand has been "mostly - but not entirely - sluggish."

He added that momentum and the kickoff of the Fed's easing cycle could continue to carry prices higher in the near term, "but the market may be tiring."

Others see demand holding up with the Fed's easing cycle finally under way, while gold's appeal as a haven remains intact amid geopolitical tensions in the Middle East and Eastern Europe.

Anticipation of a Fed rate cut, which has dragged down the dollar and bond yields, has been seen as a key driver of the gold rally. That's left the market set up for a natural pullback, said Christopher Louney, strategist at RBC Capital Markets, in a note. But he's confident the rally will continue and is likely to bring in fresh buyers.

The realization of the "long-awaited rate-cut narrative finally beginning is positive for gold, and we think it will unlock allocations otherwise still on the sidelines over the next 12 months," Louney wrote.

Christopher Granville, managing director of global political research at TS Lombard, warned of a "fattening tail risk of a pre-election 'October surprise' from belligerent U.S. adversaries" - Russia, Iran and North Korea.

"Perhaps the most obvious expression of such geopolitical tail-risk aversion would be yet more exposure to gold - or, in the case of retail investors, focused on ETF portfolios only now turning positive after the uninterrupted 25% price surge since last year," he wrote (see chart below).

"The attraction of gold as insurance against geopolitical tail risks is underpinned by the fundamental drivers for the yellow metal - both cyclical and structural - remaining robust," Granville said.

FxPro's Kuptsikevich said a collection of overbought technical indicators doesn't imply an immediate selloff for gold, and that there may be more short covering to come.

"The most violent part of the rally, with a massive short squeeze, may still be ahead," he wrote. "However, traders should also be on the lookout for signs of growth exhaustion, which could follow a very sharp correction."

-William Watts

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09-21-24 0700ET

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