Gold defies negative impact of the dollar and yield strength

Gold remains a buy-on-dip market, defying the expected negative impact of the dollar and yield strength, experts say.

Gold’s strong March rally culminated last week when the yellow metal briefly surged to a fresh record high at $2,221 per ounce after the FOMC stuck to their three rate cut projections for this year, only to suffer another mild round of profit-taking as the dollar continued higher. “Gold is heading for a March gain of around 7 per cent, while silver has managed a near 10 per cent rally after suffering mild setbacks during January and February when the dollar and US Treasury yields rose in response to traders adjusting inflation expectations to higher and lower rate cut projections,” Ole Hansen, head of commodity strategy, Saxo Bank, said in a note.

On Tuesday, spot gold added 0.33 per cent to $2,178.57 an ounce. US gold futures gained 0.36 per cent to $2,182.70 an ounce.

Overall, gold continues to defy the normal negative impact of the dollar and yield strength, both of which have risen this year. Instead, the metal has been supported by safe demand related to several geopolitical risks around the world, and not least, continued strong underlying support from central banks and retail buyers of physical gold and jewellery, especially from India and China. In addition, the early March break above $2,088 per ounce helped trigger a very aggressive buying response from technical and momentum-driven hedge funds. During the two weeks to March 12, managed money accounts bought 9.2 million ounces or 285 tonnes, an amount it took ETF investors more than seven months to sell, data showed. To put it into further perspective, central banks have, in the past two years, bought more than 1,000 tons, again highlighting the aggressive nature of the recent fund buying.

“Just so you know, this group of traders tends to anticipate, accelerate, and amplify price changes set in motion by fundamentals. Being followers of momentum, this strategy often sees this group of traders buy into strength and sell into weakness,” Hansen said. They are likely to have tight stops and no underlying exposure that is being hedged, making them most reactive to changes in fundamental or technical developments. “In the short term, gold needs to hold key support levels to avoid a fresh round of profit-taking, but so far, the corrections seen have been shallow enough to prevent temporary price weakness through long liquidation,” he added.

After hitting a fresh record high last week, gold suffered another mild round of consolidation, however, without challenging support at $2,146, followed by $2,132. Moves that happen for no apparent reason often deserve some respect, and today’s rally back towards $2,200 is one of them, happening without any notable support from other markets, highlighting a continued strong buying-on-dip mentality in the market. “We maintain our 2024 forecast for gold to reach $2,300 and silver to $28, with the technical picture pointing even higher towards $2,500,” Hansen said.

Silver, meanwhile, has been struggling for a while relative to gold, not least because the white metal has not enjoyed the support from central banks. During the past month, however, the semi-precious metal, which derives around half of its demand from industrial applications, has received a boost from a recovering industrial metal sector, not least copper, which recently reached an 11-month high, supported by a tightening mined supply outlook and Chinese smelters discussing production curbs. The improved outlook temporarily drove the gold-silver ratio to a new year-to-date low of around 85 ounces of silver to one ounce of gold before reverting higher to the current 88.40.

“While gold has made several fresh record highs this past month, silver has yet to clear a key area of resistance between $25.75 and $26.15 per ounce, with the latest setback back towards support around $24.44 per ounce being driven by funds reducing bullish bets following the strongest three-week accumulation in almost five years,” Hansen said.

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