First, while gold prices have had a strong rally this year, having hit record highs last month, we remain cautious. We think gold is overvalued from the perspective of a number of key macro drivers, and do think there are some unrealized vulnerabilities to the pillars of gold’s rally. While we are cautious, its more because we do not think gold should be at the levels just yet.
Second, while May and June have seen a less weak and more rangebound trend for gold-backed ETPs, we are not convinced that investors are beginning to follow through just yet. Investors sold their gold holdings as prices rallied, and we’ve yet to see a sustained return to buying.
Third, central bank demand has been a key pillar to the gold rally but as China’s pause in purchasing showed, there are vulnerabilities. To be clear, we still think central bank will be strong, but there are reasons to be cautious on the volume at record prices and after such a sustained period of strength.
If you’d like to hear more, here’s another few minutes. Now, the details.
aving hit record highs above $:
bank demand will be strong in:
moz at the end of may:
While investors have not followed through year to date, for the most part central banks have, representing one of the strongest pillars to the gold rally. This pillar however did take a hit recently with China’s central bank pausing purchases in its may data. The markets reaction to the end of the 18 month buying spree was a selloff. In our eyes, such a pause at this point after a long stretch of purchases recently occurring at record high prices seemed sort of natural in our eyes. More importantly though, it’s the caution we have been urging, as this rally has largely been based on a handful of relatively low-frequency, physically driven pillars. While central bank buying is not over, we are reminded of the vulnerability to this physically driven rally and think there may be better opportunities for investor to layer in. To be clear, we are not bearish on central bank demand or this pillar of the rally overall, a it will likely remain strong in a historical context. The desire for de-dollarization and diversification remain. Indeed, the World Gold Council released their central bank survey results recently, which showed that, 81% of central banks think total holdings will increase in the next 12 months, even if just 68% of central banks expect their own gold reserves to remain unchanged. We agree with this assessment and think that on a net basis, purchases will be strong, even if it’s hard to keep up the pace at record high prices as recent experience has suggested.
In conclusion, we continue to expect data releases and fed comments to impact gold, in many instances positively. Yet, we remain cautious overall, especially in the short term, expecting better opportunities as vulnerabilities are realized due to either macro drivers asserting themselves or some of the aforementioned pillars to the rally faltering. Our caution is not because current or higher prices won’t be justified in our view — it’s just that we think they aren’t just yet.
That’s all for now. Thanks for listening. And be sure to reach out to your RBC representative with any questions.
