By Neils Christensen
May 29, 2024
Although gold has found solid resistance around $2,400 an ounce, investors should not expect to see any major correction any time soon, according to one market strategist.
Insatiable central bank demand has transformed the gold market, providing solid support for the precious metal. In an interview with Kitco News, Nitesh Shah, Head of Research at WisdomTree, said he expects this demand to stay strong for a while.
Shah expects the gold market to form an interesting pattern in this environment. He explained that while central banks aren’t necessarily concerned with prices, they can still make strategic purchases.
“My guess is that every price dip they see, they’ll be buying. Maybe they slowed down the purchase a little bit in response to the high prices, but they know if they want cheaper prices, they need to load up now before the end of the year,” he said.
Along with central bank demand, Shah expects robust demand from Chinese retail investors will also provide solid support at current levels. He added that it’s not surprising that Chinese consumers are buying gold nearly as fast as central banks, as they have no other options.
“Even if gold is expensive, it is still going better than equities and the housing market,” he said.
While Shah remains bullish on gold through the rest of the year, he also noted that the broader market lacks a catalyst to spark another run to all-time highs… at least for now. Shah explained that the Federal Reserve’s monetary policy stance is keeping investors out of the gold market.
Shah said that he sees the floodgates opening when the U.S. central bank signals that it is ready to lower interest rates and start a new easing cycle. So far, the Federal Reserve has been reluctant to signal any rate cuts as inflation remains stubbornly elevated. According to the CME FedWatch Tool, markets are not expecting interest rates to remain unchanged through the summer. Markets see a 50/50 chance of a rate cut in September.
Although the Federal Reserve is not ready to cut rates anytime soon, Shah said that he expects easing to start by the end of the year. He added that the central bank will be forced to lower interest rates as the U.S. economy slows.
However, until then, gold prices remain caught in a new consolidation channel. He added that, according to his modeling, gold prices are seen as a little rich in this environment.
Along with gold, Shah also sees solid potential for silver as industrial demand continues to dominate the marketplace.
Shah noted that even if the global economy slows, demand for silver will remain resilient because it is a critical metal within many different sectors.
While silver is essential in the solar power sector, Shah explained that the growing electrification of the global economy will need more silver.
“The more electronic contact points you have in any application, the more silver you need. And we have this AI revolution going on. As we move our energy consumption away from burning oil, coal, and gas to wind and solar, we will need more electrical contact points, so we need more silver,” he said.
Renewed investor interest in silver has finally propelled it out from under gold’s shadow. Silver prices are trading near an 11-year high, above $32 an ounce. A 4% rally at the start of the week has helped push the gold/silver ratio to 73 points, its lowest level in nearly three years.
While the environment remains favorable for silver, Shah said the market still gets most of its momentum from gold. Although silver can withstand a slowing economy, Shah said it doesn’t do well in an environment of increased geopolitical risks.
He added that gold remains the go-to safe-haven asset when there is a lot of fear in the marketplace.
“It’s hard for silver to shake its gold correlation. So the gold correlation will be the most dominant thing driving prices,” he said. “Rate cuts are going to be the next catalyst for prices to move. On the back of that, we’ll see the gold rally first, and then silver will follow in a similar way to what we’ve seen.”