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While French Bank Société Générale has slightly reduced its exposure to the precious metal, it still remains positive on the precious metal as inflation remains stubbornly elevated amid plans by the Federal Reserve to end its tightening cycle.
Despite gold's lackluster performance through the summer, SocGen is optimistic that prices have a path back to $2,000 an ounce.
"Headline inflation continues to cool, but core inflation remains stubbornly high, and the Fed is near its cyclical peak. As the timing of a potential US recession recedes, these developments give the Fed the opportunity (and the obligation) to keep rates higher for longer to fight inflation. This should keep real rates elevated, and – combined with the strong dollar – creates headwinds that should cap gold prices at or below $2,000/oz to the end of this year, in our view," the bank's commodity analysts said in their latest outlook report.
Looking to the new year, the analysts said that they see gold prices pushing to $2,200 an ounce by the end of 2024 as investors realize how difficult it will be for central banks to bring core inflation down to their 2% targets.
"With the low-hanging fruit in the inflation fight already picked, we think the gold market will have to price in higher forward CPI projections. As a result, we see gold appreciating to $2,200/oz in lumpy moves by end-2024, as the market adjusts its forward inflation expectations with the macro newsflow. Further, in our anticipated scenario of moderating US rates, we see the USD weakening – an additional bullish driver that should buoy gold, together with other USD-denominated assets," the analysts said.
Although SocGen is bullish on gold, they noted that the precious metal will face a bumpy road. They said that there is still room for investment demand to weaken. The comments come as holdings in the world's biggest gold-backed exchange-traded fund have fallen to their lowest levels since January 2020.
"Despite 139t of gold being withdrawn from ETF coffers since early June, the current value, at 2,789t is more than 20% above the average holding in 2016-20 (before large inflows due to COVID panic). These elevated holdings open the door for further outflows from ETFs in the short term if no bullish catalysts galvanize investors to diversify further into gold," the analysts said.
At the same time, the bank sees some downside risks in gold's speculative positioning.
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Hedge funds still neutral on gold, silver as economic uncertainty supports prices
"While money managers' long positioning has remained elevated in 2023, we noted a strong increase of short positions in August. Gold is close to being overbought on both the 1-year and 2-year windows, according to our OBOS model. Despite the large increase in short contracts held by money managers in August, short positioning remains average. This means the highest risk for gold in terms of positioning would be a long liquidation," the analysts said.
Although the bank remains bullish on gold, last week, it announced it was lowering its exposure to the precious metal in its Multi-Asset Portfolio Strategy. Heading into the fourth quarter, SocGen now holds 5% of its portfolio in gold, down from 6% in the third quarter.
Gold represents 50% of its commodity strategy, as it holds another 5% in broader commodities, with a focus on oil.
By
Neils Christensen
For Kitco News
