The gold market continues to struggle to attract any consistent bullish momentum, and with prices retesting support at $1,700 an ounce, one bank is seeing the precious metal close to a capitulation selloff.
Thursday, commodity analysts at TD Securities reiterated their bearish outlook for gold, saying that the outlook is “bleak” as the Federal Reserve signals further aggressive monetary policy action with further rate hikes and quantitative tightening.
“Precious metals are on the brink. With every tick lower in gold prices, odds of a major capitulation event are growing, which could coincide with a break below a multi-decade uptrend in the yellow metal near $1675/oz,” the analysts said.
TDS said that investors need to continue to watch speculative positioning in the gold market as it remains the critical factor for a capitulation selloff. Speculative positioning in Comex futures markets has dropped sharply since March; however, the analysts said there is room for sentiment and positioning to fall further.
“While the hawkish Fed narrative has driven money manager positioning to multi-year lows, gold markets still feature an extremely concentrated and bloated position held by a small number of family offices and proprietary trading shops. Further, we see risks that this position is somewhat complacent, given it does not appear to be associated with a stagflationary Fed narrative, but was rather accumulated during 2020,” the analysts said.
The bearish outlook comes as markets solidify their expectations that the U.S. central bank will raise interest rates by 75 basis points in September. Last week Fed Chair Jerome Powell also warned markets that interest rates could remain elevated for longer to make sure that inflation remains well anchored.
TD Securities has been tactically short gold since late July. The Canadian bank has been tactically short silver since mid-August.
Although TDS is bearish on precious metals, they also note some positives in the marketplace. In a separate note Thursday, the bank said that the gold market continues to see solid demand out of China.
“The top players in Shanghai markets continue to add to their gold length, despite a depreciating CNY. These flows, alongside central bank demand, have likely kept gold from melting in a liquidity vacuum amid a hawkish Fed narrative,” the analysts said.
Chinese gold demand has been garnering new attention lately as the nation reenters the market after two years of disruptions due to the global COVID-19 pandemic. Trade data from Switzerland last month showed gold exports to China increased 150% in July.
The data shows that 80.1 tonnes of gold were shipped to mainland China, the biggest monthly shipment since December 2016.
However, despite growing physical demand in Asia and a solid appetite from central banks, analysts at TDS said that this wouldn’t be enough to stop gold prices from falling below $1,700 an ounce.