You never want to bet against gold

(Kitco News) – Gold’s move in the last two weeks is why investors should never bet against the precious metal.

On Oct. 6, gold fell to a seven-month low, briefly testing support around $1,820 an ounce, and the market has not looked back since. In the last two weeks, gold has rallied more than 9% as prices pushed above $2,000 an ounce ahead of the weekend.

Silver is just as impressive. Two weeks ago, it briefly dropped below $21 an ounce and is now looking to end this week around $23.50 an ounce, a rally of nearly 13%.

We have seen significant bearish sentiment in the gold market through the summer as investors continued to react to the Federal Reserve’s aggressive monetary policy stance. The central bank is looking to maintain restrictive interest rates through the first half of 2024.

However, we also warned that this negative sentiment created a ripe environment for a short squeeze; all that was lacking was a catalyst.

Unfortunately, the spark that ignited this new rally in gold came after the devastating news of a surprise attack from Hamas that killed nearly 2,000 Israelis. Since then, Israel has declared war on Hamas and this turmoil has created significant chaos in the Middle East.

This has been a terrible tragedy felt around the world, and while it seems insignificant to talk about a lump of rock with all this devastation and uncertainty around us, I just want to point out that gold is doing its job of being an anchor of stability in a world of chaos.

This rock may seem inconsequential to some, but it has been a lifesaver for others. I have friends whose families have used gold jewelry as payment to be smuggled out of war-ravaged countries. This fundamental value is one of the reasons why I have been a proponent of the precious metal.

Bottom line: gold is protection for when you need it the most.

That message was also loud and clear during the London Bullion Market Association 2023 Global Precious Metals Conference. In one of the first sessions of the conference, Peter Zöllner, head of banking department at the Bank of International Settlements, said that according to their research, investors should hold around 6% of their portfolio in gold.

At the same time, he added that in periods of heightened tail risks, it would be appropriate to hold more. BIS, a central bank for central banks, holds about 15% of its capital in gold.

There was a lot of optimism for gold and silver during the conference; however, even as positive sentiment picks up, it is important to note that the gold market is not out of the woods yet.

Yes, geopolitical uncertainty is providing a solid tailwind for gold and silver; however, we have seen many times where this does not lead to sustainably higher prices. The move we are seeing is gold is a kneejerk reaction from speculative investors, with many looking to cash in on the market’s new momentum.

A vital segment of the market is still missing; investment demand for gold-backed exchange-traded products remains lackluster as the Federal Reserve is expected to keep interest rates higher for longer.

It’s this environment that has helped to push bond yields to a 16-year high. While gold’s safe-haven allure is overshadowing higher bond yields, some investors are still focused on the precious metal’s higher opportunity costs as a non-yielding asset.

Of course, to further muddy the waters, another significant factor driving bond yields higher is the growing fear regarding the size of the U.S. government’s debt. This is a bullish factor for gold.

While seeing higher prices is exciting for many investors, this will only be sustainable if the broader market participates, so it will be essential to watch ETF inflows in the next few weeks.

For now, though, let’s enjoy the ride. Have a great weekend.