“Freak trade” drives gold to an all-time high; Market veteran urges caution

In a historic day for the yellow metal, gold raced to an all-time high, surpassing a near-mythical $2,100.0 an-ounce level for the very first time.

In trading today, gold surged to a top of $2,152.30 (£1,703.80) having smashed through the previous all-time high of approximately $2,072.0 registered on August 7, 2020.

Although in recent days, the prized commodity has been threatening to break out, the blinding speed of the move higher caught markets unaware.

The upside momentum appears to have been powered by expectations that the Federal Reserve will soon begin to cut rates.

From this point of view, the logic of the rally is straightforward.

As an asset, gold does not offer any interest, and thus, has always been at loggerheads with interest-bearing assets.

With expectations that the Fed will ease rates, gold naturally becomes more competitive.

At the time of writing, data from CME FedWatch shows a 99.7% probability that rates will hold steady in the December meeting, a 12.6% chance they will be cut on February 1^st,2024, and a combined 59.8% probability that rates will be cut by either 25 bps or 50 bps in the March meeting.

Therefore, a Q1 cut is very much on the cards.

Navneet Damani, Head-Commodity and Currency Research at MOFSL noted,

Historically…in the last 50 years, whenever there has been a situation of a rate cut in the US, gold prices have reacted pretty positively.

Bullishness also comes from the recent signs of strength in global economies and declining expectations of a recessionary scenario, which has powered the belief that gold demand may also see an uptick.

Additionally, geopolitical uncertainties and the threat of severe disruptions tend to be positive for gold, which has traditionally been viewed as the ultimate safe haven.

That is what happened earlier today when gold rallied higher after news broke that a US warship,

…successfully intercepted and shot down three drones in the Red Sea… (which were part of) attacks on three commercial vessels in international waters…

Further, the DXY has slipped to 103.3 at the time of writing and is part of the wider dollar decline that has been playing out through November 2023, while US 10-year yields were beaten down from nearly 5.000% to 4.259% in a similar time frame.

The consolidation

Despite these bullish arguments, gold prices have eased considerably from their highs earlier in the session, and are now trading at $2,063.80, down 1.2% on the day.

Crucially, prices broke beneath their previous all-time high of $2,072, which may impart resistance in the coming sessions.

Time for caution?

Surendra Mehta, Director, India Bullion and Jewellers Association Ltd. (IBJA), an organization that has been at the forefront of the industry for over a century, was taken aback by the sharp shift in price in early trading.

However, he urged that this was a,

…freak trade and one needs to have a cautious approach…it is a trap.

The concern around the unprecedented price spike comes from the fact that there was a surge of approximately $75 at the opening itself, in a period of low volumes and low liquidity.

Secondly, although the Federal Reserve has indicated that policy rates will be lowered, this process will take time.

Crucially, Mehta argues that it is better to avoid purchasing gold at this juncture and to wait for a correction,

From 6th October till today…in 60 days it has gone up $330…wait for a proper opportunity, a good opportunity…

Since the yellow metal has already seen a lot of upside momentum, he expects that a significant bull run in the future will be triggered only once prices have dropped back down to $1,900 per ounce levels.

Short-term bullish view

Not everyone was skeptical about the yellow metal in the near term with Jordan Roy-Bryne, Editor at The Daily Gold having on 3^rd December 2023, forecasted a potential gold breakout with measured upside targets of $2,300 and $2,500 per ounce.

In reference to equities, Roy-Bryne noted,

…gold stocks broke out from the inverse head and shoulders patterns and have more short-term upside.

Long run case

From a long-run perspective, as discussed above, bullish factors have begun to accumulate, dominated by a weakening dollar and expectations of rate cuts.

The pace at which the Fed eventually decides to cut rates will go a long way in determining how far gold may rise.

In addition, Damani adds that,

…central banks have started to purchase a little more aggressively than what they were doing previously in the last two years…

Larger volumes of physical buying will prove to be a crucial bullish factor.

Any fresh and unforeseen instability in the Middle East could play the role of a significant trigger for the safe haven metal.

Once again, Mehta cautions, that if gold continues to slide and breaks through the $2,032 per ounce level,

…then, we might almost see the rally coming to an end.

Final words

The price spike today came as a shock to market watchers and has unsurprisingly, led to some very bullish projections, both in the short and medium term.

However, given the run-up in the yellow metal over the past two months, low liquidity at the time of the price spike, and uncertainty around when rates will be cut, some investors may consider assessing their risk tolerance and potentially waiting for more favorable buying opportunities.