The Gold Rally Has Only Begun

Stocks fell on Friday, with the tech sector losing steam and investors grappling with a mixed bag of bank earnings.

The Nasdaq Composite tumbled by 1.3% while the broader S&P 500 index slipped by 1%. The blue-chip Dow Jones Industrial Average retreated 0.9%, shedding over 300 points.

The pullback followed a strong Thursday session where the “Magnificent Seven” tech giants led the charge, buoyed once again by the AI hype. Sentiment was also boosted by a lower-than-feared increase in the Producer Price Index, coming on the heels of an alarmingly hot consumer inflation print that had rattled markets.

As earnings season gets underway, investors are poring over financial results from the banking giants, trying to gauge the potential fallout if interest rates stay higher than anticipated throughout the year.

Asset management titan BlackRock got the ball rolling before the opening bell, with shares initially perking up in pre-market trading after the firm reported a hefty 36% jump in quarterly profit. However, the stock quickly reversed course, sliding nearly 2% as the regular session began.

JPMorgan Chase, despite beating earnings expectations, saw its shares dip as CEO Jamie Dimon highlighted “inflationary pressures” and the Fed’s monetary policy as key risks. Wells Fargo and Citigroup also traded in negative territory following their respective quarterly updates.

Amid the stock market turbulence, precious metals continued to shine bright. Gold prices vaulted above the $2,400 mark, notching a fresh all-time high. Silver also caught a bid, hitting its loftiest level since early 2021. The surge in demand for safe-haven assets comes as investors fret about escalating tensions in the Middle East while shying away from U.S. Treasuries due to stubborn inflation concerns.

Bank of America’s commodities strategist Michael Widmer argues that gold and silver rank among their top commodity picks. He sees the yellow metal being propelled higher by central bank purchases, Chinese investors, and increasingly, Western buyers responding to a confluence of macro drivers, including the wind-down of rate hike cycles.

Against this backdrop, BofA envisions gold surging to $3,000 per ounce by 2025. Widmer points out that while macro factors are fueling gains, traditional market segments crucial for sustaining rallies have been lagging. Holdings in physically-backed ETFs have been waning, and net non-commercial positions are stuck in a range.

The strategist believes that investors are holding out for rate cuts, and once those materialize, gold buying should broaden out, likely catapulting prices even higher. He also notes that Western buying may need to step up if sentiment improves in China and less money finds its way into gold.

Interestingly, the long-standing positive correlation between gold prices and physically-backed ETF holdings has broken down, with assets under management in these vehicles actually declining. A closer look reveals that investment advisors, often a proxy for retail investors, have been driving the bulk of the outflows.

Similarly, on the institutional front, net commercial futures positions have stayed well below the peaks seen in recent years. Widmer thinks silver stands to benefit as well, with prices getting an extra lift from robust industrial demand. He sees the potential for silver to break above $30 an ounce within the next 12 months.

Lackluster investor interest is one factor at play, as evidenced by the stagnant holdings in physically-backed silver ETFs. This trend is mirrored in subdued net non-commercial positions on the CME, muted trading volumes on Chinese exchanges, and tepid U.S. coin purchases.

However, there are encouraging signs on the commercial demand front, which could eventually lure investors back and reinforce BofA’s bullish outlook for the white metal in the coming year.

The bank believes that a stabilization in the global economy over the coming months would be supportive for the silver market. Imports into key markets like Japan and the U.S. are already bouncing off their lows and could trend higher from here. In a similar vein, China flipped from being a net exporter of silver in early 2022 to seeing those outbound shipments dwindle by year-end.

Coinciding with this shift, silver is no longer fetching a discount in the Chinese domestic market.

BofA’s optimism on precious metals is shared by other market heavyweights. UBS recently delved into the current gold breakout and its potential implications, noting that prices tend to surge 2-4x within a compressed timeframe during these episodes.

The Swiss bank points out that gold took 27 years to revisit its 1980 peak before breaking out in 2007. More recently, it was a 13-year journey back to the 2011 high when the metal broke out in March 2024. However, once the floodgates open, the rallies can be explosive – gold quadrupled in the span of two years during both the 1972-74 and 1978-80 episodes, and it doubled in three years from 2008 to 2011.

UBS suggests that if history repeats itself, it’s not too late for investors to jump on the gold bandwagon. Those with a 2-3 year horizon could potentially see prices double from current levels to north of $4,000 an ounce.

The key sell signal would be the advent of negative real rates and a full-blown recession. But with real rates still elevated and a downturn seemingly distant, UBS argues it’s premature to call an end to the gold bull run.

Beyond the compelling chart patterns, the bank sees gold’s breakout as an ominous portent of trouble on the geopolitical front. Against the current backdrop, it’s not hard to envision a range of unnerving risk scenarios unfolding.

As for the broader markets, UBS cautions that if the gold playbook holds true, many assets look mispriced with a multi-year outlook – from incredibly tight credit spreads to stretched equity valuations and depressed volatility.

While investors may need to keep dancing as long as the music plays, to borrow a phrase from Chuck Prince, it’s clear that the gold market has sounded the alarm.

And of course, we have to touch on Goldman Sachs, which came out swinging this morning. The bank notes that copper and gold held their ground after the PPI print despite the backup in yields and the dollar flexing its muscles.

Goldman doesn’t see sustained greenback strength materially denting copper, given how bullish the fundamental story remains. As for gold, the bank has long contended that it outperforms during easing cycles – and we haven’t even seen any cuts yet. That outperformance looks set to persist, underpinned by central bank demand, the U.S. fiscal situation, and potential geopolitical tailwinds.

In fact, the venerable firm released a fresh report today, lifting its year-end gold forecast to $2,700 on the back of “unsurprising resilience.”

The metal’s impressive ability to hold steady after the upside inflation surprise was yet another sign that this bull market is marching to a different beat. Gold has surged 20% over the past couple of months despite the Fed taking a more hawkish turn, growth expectations firming, and equities hitting record highs.

None of the usual macro culprits – real rates, growth, or the dollar – can adequately explain the ferocity of the rally thus far in 2023. But Goldman argues that this substantial deviation from traditional valuation models is neither a new development nor evidence of froth.

Instead, the lion’s share of gold’s gains since mid-2022 have been powered by incremental physical drivers like a marked acceleration in central bank purchases by emerging markets and resurgent retail demand in Asia.

Those tailwinds remain very much intact, reinforced by the current macro and geopolitical backdrop. Throw in the prospect of Fed easing acting as a spark for ETF inflows later in the year, plus the wild card of U.S. election risk and a precarious fiscal position, and gold’s path of least resistance clearly skews higher.


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