Gold market may face 'roadblocks': Analyst

As gold (GC=F) hovers near record highs, James Steel, HSBC’s chief precious metals analyst, joins Morning Brief hosts Brad Smith and Seana Smith to discuss what to expect from the gold market.

“I think we're going to see increasing resistance” from current levels, Steel says, explaining, “There's a couple of things that would imply that the market is going to run into some resistance. One is that jewelry, underlying physical demand, is down. Jewelry is down. Fifty percent of all physical demand for gold is in jewelry. Most of that is in the non-OECD world. That demand is slowing because of high prices. They're very price-elastic. Coin and bar demand is slowing as well.”

“These changes in the physical demand will often take a very long time to push into prices because right now, we have a lot of momentum buying in the market and a lot of technical buying, and a lot of it predicated off of expectations of more rate cuts. So near term, we probably have a little bit more upside, but we're a little suspicious of it above $2,600. That's not to say that we can't move a little higher in the near term, but there are some roadblocks ahead.”

The analyst adds that gold going higher depends on the Federal Reserve’s rate cuts. “Gold does have a history of rallying during Fed rate-cutting cycles, but much will depend on how much of this is baked into the price already. And certainly, after the 50 basis point cut, perhaps we won't see cuts quite that aggressive.” Steel forecasts a series of 25 basis point cuts at each Fed meeting for the rest of the year, which he says is largely baked into the price.

He says “a lot will depend on how the dollar reacts. We're sort of looking for a somewhat firmer dollar, not simply because the Fed is cutting, which would tend to be negative for the dollar, but because other central banks are also going to cut and also that the US economy is doing well."

On central bank purchases, Steel says, “There's very good reasons that a central bank would want to own more gold, but they will also be price sensitive, and we are at very high prices, and if they're playing a long game, they don't have to rush into the market. I think we're likely to see them moderate purchases in the second half of the year, which may also create a little bit of headwind for gold.”

For more expert insight and the latest market action, click here to watch this full episode of Morning Brief.

This post was written by Naomi Buchanan.

Video transcript

Gold hovering your record highs ahead of PM.

I data out later this morning the precious metal reaching those all time highs following the feds a 50 basis point cut last week to discuss whether or not we're headed higher or if there are risks ahead that investors should keep in mind for gold.

We wanna bring in James Steele.

He's HSB CS chief of precious metals analyst I.

It's great to have you, James.

So let's talk about where we're trading right now.

We have gold right above that 2600 level.

Is there much more room to the upside or we likely go and you see a pull back from these levels.

Well, I think we're going to see increasing resistance up here.

There's a couple of things that would imply that the market is going to run into some resistance.

One is that, uh, jewellery underlying physical demand is down.

Uh, jewellery is down 50% of all a physical demand for, uh, gold is in jewellery.

Uh, most of that is in the, um, non OECD world.

Uh, that demand is slowing.

Uh, because of high prices.

They're very price elastic coin and bar demand is slowing as well.

Now, the problem is that these changes in in, In, In the physical, uh, demand will often take a very long time, uh, to push into prices, because right now we have a lot of momentum buying in the market.

Um, and a lot of technical buying, Uh, and a lot of it predicated off of expectations of more rate cuts.

So near term, Sure, we probably have a little bit more upside, but we're a little, um, uh, suspicious of it above, uh, $2600.

That's not to say that we can't move a little higher in the near term, but there are some roadblocks ahead.

How much of that is is predicated in in gold going higher from these levels, predicated on the fed aggressively cutting or continuing to cut.

Yes, I think that's right.

And, uh, uh, these cuts have been well telegraphed.

I mean, uh, gold does have a history of, uh, rallying during fed, uh, rate cutting cycles.

Uh, but much will depend on how much of this is baked into the price already.

And certainly after the 50 basis point cut, perhaps we won't see, uh, a cuts quite that aggressive.

We're forecasting a series of 25 basis point cuts, uh, going forward and we'll have to see what, uh, fed fed speakers are going to say to imply one way or the other.

But some moderation in the rate cutting cycle would tend to remove some oxygen from the gold market.

You're absolutely right.

So, J, can you just repeat that?

What did you say?

Was your base case or your expectation for the Fed's next move?

Uh uh, 25 basis points for the next two this year.

And, uh, it excuse me and into next year?

OK, so 50 total before the end of the year, which makes a lot of sense.

And that is, uh, the largest week.

I guess what?

Some market participants are pricing, and I'm curious what you make just about this entire debate, whether or not we're going to get 50 or 25 at this next meeting and exactly what that means for the price of gold and just pre precious metals beyond that, just given the fact that there is so much uncertainty and a lot of that is already being priced into some of this lead up trade that we've seen?

Yes, What we're looking for, as I say, 25 basis points for the next, uh uh, for the meetings for the end of this year.

Uh, that's probably mostly begged into the price.

Uh, now, a lot will depend on on on how the dollar reacts.

Um, we're sort of looking for a somewhat firmer dollar.

Uh uh, not simply because the Fed is cutting, which would tend to be negative for the dollar, but because other central banks are also going to cut and and also that the US economy, as your previous speaker said, uh is doing well.

So by comparison, the US is doing quite well.

If if this firms the dollar, um which we anticipate that it will, that that would be a negative on gold and and and that would restrain that would restrain further routes.

But with that in mind, you're also watching some of the central bank actions that, uh as they're initiating or or thinking about cutting and that policy pathway there.

They're also looking at where they might be purchasing into some of these precious metals and gold.

Specifically, what type of buying power or or buying.

Uh, proponent, do you believe they'll continue to be and and bolster the price action we've seen thus far?

That's an excellent question.

And really, And you've hit one on one of the really seismic changes in the gold market in the past few years.

In 2022 central banks bought 1008 82 tonnes of gold.

Last year, they bought about 1030 tonnes of gold.

Now, this is double more than double the average of the previous 10 years, which is 404 $150.

So you can imagine this has absorbed a great deal of demand.

Um, now, in the first half of this year, they've been pretty strong.

Uh, over 400 tonnes.

Uh, 480.

Odd, I think, Um uh, the second half, I mean, we're looking for these high prices to curb official sector demand as well.

It doesn't mean that they're not still on a long term buying, uh, programme, which, and we believe there's very good reasons that a central bank would want to own own more gold.

But, you know, they they they will also be price sensitive and we are at very high prices.

And if they're playing a long game, they don't have to rush into the market.

So I think we're probably likely to see them.

Moderate purchases, Uh, in the second half of the year, which may also create a little bit of headwind for gold.

James Steele HS BC Chief Pres precious metals analyst.

Thank you so much for taking the time here with us this morning.

Thank you very much.