Is Gold a Good Investment?
Nov 29, 2023
Key Takeaways:
- Gold is starting to shine again after confirming support off its rising 200-day moving average last week. A meaningful pullback in interest rates and the dollar underpinned the recovery in the yellow metal.
- Momentum indicators point to a bullish trend change, while speculator long positions in gold continue to outpace shorts.
- Central bank demand for gold is building, evidenced by record buying during the first nine months of the year.
- Seasonal tailwinds return next month as gold enters its best two-month seasonal period.
- However, resistance near $2,070 has been problematic for gold over the last several years, so while a retest of this level may be in the cards, a confirmed breakout will be required to keep gold’s upside momentum moving forward.
Gold has regained its luster this month as the narrative surrounding monetary policy changed from tightening to potential rate cuts coming as early as next spring. Interest rates—including real yields— and the dollar all pulled back meaningfully. Ongoing geopolitical tensions in the Middle East have also supported a risk premium in the yellow metal.
As shown in the chart below, gold found support last week off its rising 200-day moving average (dma) at $1,939. Technically, a close above the October highs at $2,009 should pave the way for a retest of the prior highs near $2,070—a major resistance hurdle for the yellow metal to clear.
Momentum indicators are confirming the bullish price action. As shown in the middle panel, the positive directional movement indicator (+DMI) recently crossed back above the negative directional movement indicator (-DMI), signaling a change in trend direction. Managed money net futures positions (typically hedge funds), shown in the bottom panel, are also back in positive territory after briefly turning negative last month, implying long positions among speculators are outpacing short positions. Furthermore, while positioning remains bullish, it has not reached extremes or levels we consider contrarian.
Gold Demand is Growing
Hedge funds are not the only ones buying gold. According to the World Gold Council, gold demand in the third quarter was 8% above its five-year average, with central banks buying 337 tons (representing nearly 30% of total demand during the quarter). For the year, central banks have now purchased a net 800 tons of gold, marking the highest on record for a nine-month period. The World Gold Council further noted buying has been broad-based, stating, “While there is a nucleus of committed regular buyers, the range of countries whose central banks have added to their reserves over recent quarters is broad-based.”
Seasonal Tailwinds Return
Gold is coming into a seasonally strong period. Over the past 50 years, gold has gained an average of 1.4% and 1.9% in December and January, respectively, making it the precious metal’s best two-month period over this timeframe.
SUMMARY
The macro backdrop for gold has improved. Real yields and the dollar have recently pulled back through key support levels as the market looks ahead to a potential shift in monetary policy next year. The anticipation of rate cuts, along with elevated recession odds, ongoing geopolitical tensions, and increased central bank buying in gold should continue to support price action. Seasonal tailwinds also return next month as gold enters its best two-month seasonal stretch. However, resistance near $2,070 has been problematic for gold over the last several years, so while a retest of this level may be in the cards, a confirmed breakout will be required to keep gold’s upside momentum moving forward.
IMPORTANT DISCLOSURES
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors. To determine which investment(s) may be appropriate for you, please consult your financial professional prior to investing.
Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments. For more information on the risks associated with the strategies and product types discussed please visit https://lplresearch.com/Risks
References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.
Unless otherwise stated LPL Financial and the third party persons and firms mentioned are not affiliates of each other and make no representation with respect to each other. Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services.
All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.
Precious metal investing involves greater fluctuation and potential for losses.
The fast price swings in commodities will result in significant volatility in an investor’s holdings. Commodities include increased risks, such as political, economic, and currency instability, and may not be suitable for all investors.
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