Gold is still on course to hit $3,000, but new drivers are more dynamic

NEW YORK (February 27) Gold's drive toward $3,000 an ounce pushed the market into overbought territory, raising the risks for short-term selling pressure.

Although gold prices have fallen below $2,900 an ounce as investors take profits, one market analyst says that the precious metal remains well supported. Rising inflation pressures and chaos surrounding potential global trade wars have increased the risks of government and central bank policy mistakes impacting global economic activity.

Spot gold last traded at $2,879.20 an ounce, down 1.26% on the day. Gold prices are down nearly 2.5% from Monday’s record high.

In a recent interview with Kitco News, Nitesh Shah, Head of Commodities & Macroeconomic Research, Europe at WisdomTree, noted that his modeling shows gold prices are about 15% overvalued. However, he added that there is not much conviction behind the modeling as traditional drivers for the precious metal have been replaced with more dynamic factors. He explained that his model accounts for about 65% of the current price action.

“Central bank demand, China’s broader role in the marketplace, and other factors haven’t been present long enough to properly model right now,” he said. “It’s these emerging factors that are driving gold higher.”

Another difficult-to-measure factor is geopolitical uncertainty. Although the Federal Reserve has shifted to a neutral monetary policy stance as inflation risks remain elevated, Shah said that he expects rising geopolitical chaos to provide further support for gold prices.

“[President Donald Trump] wants to use tariffs as a bargaining chip to get a whole bunch of other things achieved. But, the risk of an accident is huge,” he said.

After a one-month reprieve, Trump announced Thursday that he will be placing 25% tariffs on imported goods from Canada and Mexico, while an extra 10% tariff will be placed on Chinese imports.

The tariffs are expected to spark a trade war as both Canada and Mexico have said they will launch retaliatory tariffs on U.S. products.

Economists have been warning investors that a global trade war could drive inflation pressures higher and weaken economic activity.

“If we do head into that recessionary scenario coupled with inflation, that could be a massive boon for gold,” Shah said. “From that perspective, gold prices could go substantially higher than they are today, and that 15% gap is just meaningless.”

At the same time, Shah said that solid demand from China, along with central bank purchases, will provide support for gold’s long-term uptrend.

Although higher gold prices are impacting physical demand, Shah said that Chinese demand is significantly less elastic than that of other trading hubs.

“Even if prices continue to rise, Chinese consumers will continue to buy gold because they still don’t have enough viable investment options,” he said. “Unless the Chinese government comes up with some really strong stimulus plans, retail investors will still go towards gold.”

Looking at central bank gold demand, Shah noted that official reserves are still fairly low compared to historical levels. He noted that China’s gold holdings represent only about 5% of total reserves.

“That is a tiny amount,” he said. “I don’t think the central bank has any other option but to buy more gold.”

KitcoNews