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Gold fundamentals still remain intact

Possibility of rising US debt a concern for markets, expert says

Gold has mostly been in a freefall over the last couple of weeks, since Donald Trump was elected US President. However, there is no change in market fundamentals and the medium term outlook remains strong, an expert said.

“Trump was not the reason why gold is up 40 per cent this year. That’s because of the general unrest and uncertainty in the world. I think, from a long-term perspective, you have to ask yourself, “Are these going to go away by this event?” Probably not, so you ask yourself, “Does that mean that the direction is still towards higher prices?” Yes, I believe it is,” Ole Hansen, head of commodities strategy at Saxo Bank, told Khaleej Times in an interview.

The current decline in gold prices is primarily because the market was starting to run a little bit out of oxygen, Hansen said.

With the surprisingly very strong result for Trump 2.0, the market’s initial response has been a much stronger dollar, rising bond yields, and a recalibration of the expectations for rate cuts. The most concerning part for the market is the worry about rising US debt, Hansen said. “Initially, it will mean more debt and higher risk on debt. Basically, for the last six or nine months, when you ask the World Gold Council, when they ask their investors, what are the reasons why you’re buying gold, the debt query is something that is coming into the front. It was inflation and a geopolitical risk, but, overall, it’s as much the risk of a debt event, simply because of overloading economies with debt,” Hansen said.

Right now, gold is testing around the $2600-level. “It is a relatively important area, but even if it should fall a bit further, I don’t see this more as a, probably from a longer-term perspective, a good thing because speculators are getting out of leveraged positions right now but physical buyers, both in China and India, were starting to baulk a little bit of paying these very high prices due to the rapid ascent. So, a setback and a period of consolidation is probably good for the appetite to come back again,” Hansen said.

With the Indian wedding season about to start, there’s going to be an elevated demand from India as well, but more from a psychological point of view and not from an actual tonnage perspective, Hansen said.

There has also been a net selling by gold ETFs in recent days. “ETFs holdings last week was the biggest redemption since March or since May. So that’s probably offsetting. But ETF flows come and goes. Physical gold bought from the market tends not to come back again. That stays in family pockets for generations. That’s why I think we’ve seen, for now; for the past two years, that since this dislocation between some of the normal drivers for gold and the price, since we started to hike rates gradually in 2022, that should be negative for gold,” Hansen said.

The direction for gold is likely to be clearer as the new Trump administration takes office, Hansen said. “It really all depends on how deep this correction is going to be now. Because normally when we have a decent correction then it’s not just a V-shaped recovery. It tends to be a bit more of a flat view. It takes a little bit of time before you get the momentum back into the market,” he added.