Gold prices extended their record-breaking run on Monday, briefly hitting a fresh all-time high of $2,372.5 per ounce before trading mixed at $2,327 per ounce around 1:45 p.m. London time. The yellow metal's repeated record-setting performance in recent weeks has been attributed to robust U.S. economic data and elevated geopolitical tensions. However, not all experts are convinced that gold prices will continue their upward trajectory.
Bob Parker, senior advisor at the International Capital Markets Association, highlighted two factors contributing to gold's recent rally. "Factor number one is what I call the catch-up effect, whereby, if you look at actually the ratio of gold relative to global equity markets last year and the beginning of this year, gold massively underperformed," Parker told CNBC's "Squawk Box Europe" on Monday. He also pointed to a correlation between bitcoin and gold, as well as potential central bank buying, particularly from Asian central banks, as factors driving the precious metal's price.
Despite gold's traditional status as a "safe haven" asset during times of financial uncertainty, Parker believes that the fundamentals for gold appear bearish. He cited U.S. dollar strength, rising bond yields, doubts over the Federal Reserve's rate cutting plans, and "reasonably" low inflation as factors suggesting that the upside in gold is minimal. "All of those factors actually suggest that upside in gold, frankly, is minimal and I think gold is now very vulnerable to a setback," Parker warned.
Market participants are closely monitoring comments from Fed officials regarding the expected number of rate reductions likely to take place this year. The U.S. central bank last month held interest rates steady for a fifth consecutive meeting, keeping its benchmark overnight borrowing rate at 5.25%-5.5%, and signaled that it still expects three quarter-percentage point cuts by the end of 2024. However, Fed officials have since raised the prospect of zero rate cuts if inflation remains sticky, and better-than-expected job creation in March could potentially delay the anticipated rate cuts.
Edmund Shing, chief investment officer at BNP Paribas Wealth Management, expressed puzzlement over the strength of gold's rally. "We have been very bullish on precious metals for a while so obviously that's great but even we are a little bit puzzled as to the strength of gold," Shing told CNBC's "Street Signs Europe" on Monday. He noted that gold's momentum has broken away from its traditional correlation to real interest rates and the U.S. dollar, and suggested that investors may be looking further ahead to issues such as debt sustainability.
Both Parker and Shing highlighted the role of central bank demand in boosting gold prices, with Shing pointing out that central banks around the world, particularly those of China, India, and emerging markets, have been accumulating gold steadily.
Shing also drew attention to the reaction in other precious metals, particularly silver, which he believes may be even more exciting right now. "What may be more even exciting right now is the reaction we're seeing in other precious metals, notably silver, which is finally starting to catch up. But it is still far, far away from its $50 an ounce all-time high reached all the way back in 2011," Shing said. Analysts have previously told CNBC that silver appears well placed to outshine gold in the second half of the year.
As investors await the March inflation data on Wednesday, gold remains supported well above $2,300. The precious metal's rally has left some onlookers puzzled amid a lack of any obvious trigger for the sudden surge that began in mid-February, especially as traders have unwound bets for steep rate cuts during that period.
UBS Group AG has boosted its year-end gold outlook by 11% to $2,500 an ounce, with a revival in demand for bullion-backed exchange-traded funds set to support another leg up when the Federal Reserve cuts rates around mid-year, according to a note from analysts including Giovanni Staunovo.
Geopolitical tensions in the Middle East, including Israel's removal of some troops from southern Gaza and Iran's preparation for a response to a suspected Israeli attack on its consulate in Syria, have also contributed to increased haven demand for gold.
As the market awaits key U.S. inflation data and further clarity on the Federal Reserve's rate cutting plans, the debate surrounding gold's future trajectory and the potential for silver to outperform continues to captivate investors and analysts alike.
