The price of gold has hit numerous record highs recently. But can those gains continue or is there a potential correction looming? Daniel Ghali, Senior Commodity Strategist with TD Securities, speaks with MoneyTalk’s Greg Bonnell about the forces driving the precious metal higher and the outlook going forward.
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[AUDIO LOGO]
It may have been dampened briefly by Wednesday's hotter-than-expected US inflation data, but the price of gold continues to hit new milestones. So more upside likely? Or has the rally run its course? Here to give us his take, Senior Commodities Strategist Daniel Ghali of TD Securities. Daniel, great to have you back on the show.
Yeah. Thanks for having me.
All right, so when we talk about asset classes in the spotlight so far this year, gold is definitely one of them. What's been happening here?
Yeah. You know what? This is probably one of the most exciting times in precious metals for a number of reasons. We spoke earlier this year about the fact that macro traders started the year with historic dislocations. They were historically under-positioned ahead of a Fed cutting cycle.
That's what propelled gold to reach new all-time highs. But at the same time, in our view, that buying activity ran out of steam by the time gold prices reached $2,200 an ounce. And the buying activity since then actually points to some mysterious buyer, which we think might be associated with currency intervention ongoing in China.
OK, so one of the things we've talked about over the past year and a half or so was central bank buying, and this idea that with some concern about currency markets, that people were getting back into gold. So you're saying the mysterious buyer-- let's dig deeper into this idea of the mysterious buyer. You think the fundamentals played themselves out, but yet, the buying continued.
Yes. So what's curious about the buying activity so far this year is that Fed cuts are being priced out, but gold prices are rising. The US dollar is rising, but gold prices are rising. Real rates are rising, but gold prices are rising.
Clearly, the traditional playbook that investors look at for gold is not working out. And there's a very valid reason for that. We spoke about the fact they were under-positioned. That under-positioning has resolved itself now. They are holding as much gold as you would expect given the Fed outlook.
But at the same time, there must, therefore, be something else that's going on. And in our view, if you're ready to get really nitty gritty and you break down the fact that there is no evidence of this buying activity from $2,200 an ounce to today's prices that is showing up on exchange data, nor in the US, nor in China, where the largest traders in China are now currently selling gold.
You also have evidence that the very strong physical market demand that was coming from retail consumers in China is now subsiding with wholesale demand in China starting to come off after an exceptionally strong start to the year. So who is this mystery buyer? We know that it has extremely deep pockets, because the scale of buying that it must take for gold prices to rise this much is very significant.
We also know that the buyer is probably not transacting through typical channels. So what that tells us, it's most likely associated with a central bank. What's curious about that is that there seems to be a sense of urgency behind this particular buying program, which is not typical of what we've been discussing over the last two years, right?
It's been at least since 2022 that central bank buying is hitting records. But the level of aggression in terms of this buying program is not typical of what we've seen over the last two years. And that's what leads us to believe that it might be associated with some form of currency intervention.
Now, when it comes to central bank buying, the mystery buyer, the big bid-- does this put the rally at risk, then? Because you're saying, I mean, we've outstripped the fundamentals. And it's been-- gold has moved almost like a tech stock, right? We expect to see movements in gold, but not the kind of rally we've had.
Yeah, certainly, at least not in this current macro context, which is one where, yes, inflation is coming in hotter, but the market is simultaneously pricing out Fed cuts. So what I'm spending the most of our of our time on the strategy side is trying to figure out whether this buying activity has simply lifted the floor on gold prices or whether gold prices will not be able to sustain the recent gains once this buying activity dries up.
If the buying activity did dry up, would you anticipate a sizable correction or just sort of a leveling out of the trade? What could happen to the price of gold in the near-term if we don't simply understand what's going on, it sounds like?
Well, it increasingly looks the mystery bid that has propelled gold from $2,200 to current prices is unlikely to sell their newly-acquired gold. If it is, indeed, a currency intervention, then it's not like that central bank will turn around tomorrow and sell all the gold that they've recently acquired. So what that means is it might just be simply lifting the floor price on gold. And once that buying activity dries up, the remaining path for gold will depend on how the macro economy evolves.
All right, so gold is an interesting one. I'm glad we have you here on a regular basis to keep on top of all these very intriguing developments. What about the move in silver as well-- often called poor man's gold?
Yes. The move in silver-- silver markets might just be the most exciting energy transition theme in the commodities complex today. We spend so much time talking about copper, about oil when it comes to the energy transition, but so little attention is placed on silver. We think that over the next year or two, one of the major assumptions that underlies silver markets is going to be challenged.
Here, I'm referring to the fact that, for the longest time, physical supply surplus or deficits didn't really tend to matter for silver markets. The reason they didn't matter is because you tended to have at least 1.6 billion ounces of silver sitting in inventories. So that was always amply enough to fill the gap with any physical market deficit.
The challenge today is that you've actually had a very significant erosion in the amount of silver that is actually available for purchase. Within those vaults, and particularly in London, which has the largest bullion vaulting system in the world, about 75% of those inventories are earmarked by another holder. The London bullion market is 75% of the world's inventory system, but a significant portion is earmarked by ETF holders, for instance.
That leaves a significantly smaller portion of silver inventories that are actually freely available today. And the challenge here is that the universally-recognized deficits expected by markets over the next few years might just erode those inventories in the next 12 to 24 months.
I know you're not a mining analyst, but if we're talking about tight inventories, is the mining industry keeping up with what could be silver demand in the years to come?
Well, here's what's interesting as well is that silver is one of those metals that is primarily mined as a byproduct. People that mine zinc, or lead, or gold, et cetera end up mining silver at the same time. So what's funny about that is that it's actually also one of those commodities that tends to have a structural seller. Since it's mined as a byproduct, miners tend to sell it as it's not their primary asset for their stockholders. [AUDIO LOGO]
[MUSIC PLAYING]
It may have been dampened briefly by Wednesday's hotter-than-expected US inflation data, but the price of gold continues to hit new milestones. So more upside likely? Or has the rally run its course? Here to give us his take, Senior Commodities Strategist Daniel Ghali of TD Securities. Daniel, great to have you back on the show.
Yeah. Thanks for having me.
All right, so when we talk about asset classes in the spotlight so far this year, gold is definitely one of them. What's been happening here?
Yeah. You know what? This is probably one of the most exciting times in precious metals for a number of reasons. We spoke earlier this year about the fact that macro traders started the year with historic dislocations. They were historically under-positioned ahead of a Fed cutting cycle.
That's what propelled gold to reach new all-time highs. But at the same time, in our view, that buying activity ran out of steam by the time gold prices reached $2,200 an ounce. And the buying activity since then actually points to some mysterious buyer, which we think might be associated with currency intervention ongoing in China.
OK, so one of the things we've talked about over the past year and a half or so was central bank buying, and this idea that with some concern about currency markets, that people were getting back into gold. So you're saying the mysterious buyer-- let's dig deeper into this idea of the mysterious buyer. You think the fundamentals played themselves out, but yet, the buying continued.
Yes. So what's curious about the buying activity so far this year is that Fed cuts are being priced out, but gold prices are rising. The US dollar is rising, but gold prices are rising. Real rates are rising, but gold prices are rising.
Clearly, the traditional playbook that investors look at for gold is not working out. And there's a very valid reason for that. We spoke about the fact they were under-positioned. That under-positioning has resolved itself now. They are holding as much gold as you would expect given the Fed outlook.
But at the same time, there must, therefore, be something else that's going on. And in our view, if you're ready to get really nitty gritty and you break down the fact that there is no evidence of this buying activity from $2,200 an ounce to today's prices that is showing up on exchange data, nor in the US, nor in China, where the largest traders in China are now currently selling gold.
You also have evidence that the very strong physical market demand that was coming from retail consumers in China is now subsiding with wholesale demand in China starting to come off after an exceptionally strong start to the year. So who is this mystery buyer? We know that it has extremely deep pockets, because the scale of buying that it must take for gold prices to rise this much is very significant.
We also know that the buyer is probably not transacting through typical channels. So what that tells us, it's most likely associated with a central bank. What's curious about that is that there seems to be a sense of urgency behind this particular buying program, which is not typical of what we've been discussing over the last two years, right?
It's been at least since 2022 that central bank buying is hitting records. But the level of aggression in terms of this buying program is not typical of what we've seen over the last two years. And that's what leads us to believe that it might be associated with some form of currency intervention.
Now, when it comes to central bank buying, the mystery buyer, the big bid-- does this put the rally at risk, then? Because you're saying, I mean, we've outstripped the fundamentals. And it's been-- gold has moved almost like a tech stock, right? We expect to see movements in gold, but not the kind of rally we've had.
Yeah, certainly, at least not in this current macro context, which is one where, yes, inflation is coming in hotter, but the market is simultaneously pricing out Fed cuts. So what I'm spending the most of our of our time on the strategy side is trying to figure out whether this buying activity has simply lifted the floor on gold prices or whether gold prices will not be able to sustain the recent gains once this buying activity dries up.
If the buying activity did dry up, would you anticipate a sizable correction or just sort of a leveling out of the trade? What could happen to the price of gold in the near-term if we don't simply understand what's going on, it sounds like?
Well, it increasingly looks the mystery bid that has propelled gold from $2,200 to current prices is unlikely to sell their newly-acquired gold. If it is, indeed, a currency intervention, then it's not like that central bank will turn around tomorrow and sell all the gold that they've recently acquired. So what that means is it might just be simply lifting the floor price on gold. And once that buying activity dries up, the remaining path for gold will depend on how the macro economy evolves.
All right, so gold is an interesting one. I'm glad we have you here on a regular basis to keep on top of all these very intriguing developments. What about the move in silver as well-- often called poor man's gold?
Yes. The move in silver-- silver markets might just be the most exciting energy transition theme in the commodities complex today. We spend so much time talking about copper, about oil when it comes to the energy transition, but so little attention is placed on silver. We think that over the next year or two, one of the major assumptions that underlies silver markets is going to be challenged.
Here, I'm referring to the fact that, for the longest time, physical supply surplus or deficits didn't really tend to matter for silver markets. The reason they didn't matter is because you tended to have at least 1.6 billion ounces of silver sitting in inventories. So that was always amply enough to fill the gap with any physical market deficit.
The challenge today is that you've actually had a very significant erosion in the amount of silver that is actually available for purchase. Within those vaults, and particularly in London, which has the largest bullion vaulting system in the world, about 75% of those inventories are earmarked by another holder. The London bullion market is 75% of the world's inventory system, but a significant portion is earmarked by ETF holders, for instance.
That leaves a significantly smaller portion of silver inventories that are actually freely available today. And the challenge here is that the universally-recognized deficits expected by markets over the next few years might just erode those inventories in the next 12 to 24 months.
I know you're not a mining analyst, but if we're talking about tight inventories, is the mining industry keeping up with what could be silver demand in the years to come?
Well, here's what's interesting as well is that silver is one of those metals that is primarily mined as a byproduct. People that mine zinc, or lead, or gold, et cetera end up mining silver at the same time. So what's funny about that is that it's actually also one of those commodities that tends to have a structural seller. Since it's mined as a byproduct, miners tend to sell it as it's not their primary asset for their stockholders. [AUDIO LOGO]
[MUSIC PLAYING]