Despite a significant rally this year, the gold market is encountering a formidable resistance level as it consolidates just below last month’s record highs, according to market strategist Nicky Shiels.
In her latest analysis, Shiels, who is the Head of Research and Metals Strategy at MKS PAMP, pointed out that gold has only achieved 30% annual gains three times in the past 30 years, with this year marking the latest instance. The previous occurrences were in 2007, when prices climbed 31%, and in 2010, when they rose by 30%.
Gold futures for December were last priced at $2,640 an ounce, reflecting a 27% increase year-to-date. Shiels highlighted that, following the 30% milestone reached in September, gold prices have faced challenges in recent weeks as market expectations shifted away from aggressive interest rate cuts during the Federal Reserve’s easing cycle.
One of the key factors influencing gold’s price movement is the unknown demand in opaque over-the-counter (OTC) markets and unreported central bank purchases, which Shiels estimates accounts for about 10% of the market activity. “OTC and unknown physical flows are increasingly driving price action in today’s wartime economy,” she noted. “This contributes to wider trading ranges and greater price volatility due to reduced visibility.”
She explained that while bears may argue that gold has overshot its mark, bulls contend that substantial OTC investment buying—beyond central bank activity—has been a significant driver of prices. “The buying is consistent and sticky, especially from retail and physical trading hubs across the Middle East, India, and China,” Shiels added, although she noted a recent softening in the Chinese market, with the Shanghai Gold Exchange (SGE) showing a discount of about $30.
While this OTC demand remains an uncertain element, Shiels identified signs of consolidation in known markets, suggesting that long-term bullish support remains intact.
She observed that speculative bullish positioning seems somewhat overextended, introducing a layer of froth to the market. Nonetheless, she believes there’s ample room for growth based on historical metrics, noting that current speculative positioning is only one-third of its historical average.
“Investors, including those in the Commodity Futures Trading (COT) and Exchange-Traded Funds (ETF), currently hold 108 million ounces of gold—below previous peaks seen during significant market events like COVID-19, the Russian invasion, and the U.S. banking crisis,” Shiels stated. “Current holdings are 5 million ounces lighter compared to these peaks, mainly due to ETFs remaining underweight rather than rapid money or COT underweight. Year-to-date, investors have added 9.3 million ounces; annualized, this amounts to approximately 11.2 million ounces, matching the inflows seen in 2020 but falling short of the substantial inflows recorded in 2019 (+38 million ounces) and 2009 (+33 million ounces).”
Moreover, she noted that, in light of the vast liquidity present in the market during this easing cycle, generalist exposure to gold remains significantly underweight.
Shiels continues to advocate for buying on dips, underscoring that central bank demand still supports gold prices, despite a slowdown in official purchases during the second half of the year. “The reduced pace of central bank buying in 2024 hasn’t unnerved the markets, but it has contributed to gold prices stabilizing around $2,600 since August,” she stated.
Looking at the broader context of gold, Shiels emphasized that the gold market is far from overcrowded, indicating that prices have yet to peak.
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