Has gold peaked? Prices may be overbought, but the precious metal is still under-owned, says TD Securities

(Kitco News) – The gold market has seen a sharp pullback a day after hitting an intraday record high above $3,500 an ounce; however, one market analyst says that the rally is far from over as the precious metal is significantly under-owned and still cheap by some metrics.

In a recent interview with Kitco News, Bart Melek, Head of Commodity Strategy at TD Securities, said that investors could expect to see some short-term volatility as gold’s parabolic push above $3,400 an ounce has made gold prices “overbought on some technical levels.”

However, looking at the broader landscape, he said that gold remains ignored by investors at large.

As to how high prices can go in this current uptrend, Melek said that gold’s inflation-adjusted highs going back to the 1970s put the all-time high at $3,544 in the spot market.

“That might not be a bad technical target for gold,” he said. “Looking at historic gold prices vs the cost curve, the ratio shows we can go a lot further from here.”

In the case of a broader correction, Melek said that he is watching to see if $3,100 holds as support. Spot gold last traded at $3,279.10 an ounce, down roughly 3% on the day. Gold prices are down more than 6% from their recent overnight all-time highs.

Breaking down investors in the gold market, Melek noted that commodity trading advisors (CTA), who are generally considered speculative trend followers, are significantly long gold futures with most at max positioning. This could create some short-term pressure on gold as this cohort takes profits at elevated prices.

At the same time, Melek pointed out that non-CTA discretionary traders are still not buying gold.

“The big reason this sector of the market is not buying gold is because the cost of carry is still pretty darn high. Inflation remains stubborn, and some are starting to wonder how aggressively the Fed can cut rates,” he said.

Last week, Federal Reserve Chair Jerome Powell said the central bank would wait for more data on the economy’s direction before adjusting its current monetary policy.

Melek said he expects weaker economic growth will force the Federal Reserve to cut rates, driving new investor demand for gold.

He added that while the opportunity costs of holding gold will remain high, it remains an important safe-haven asset.

“ If equities aren’t performing well, gold tends to be a good risk-mitigating asset, particularly as there are growing concerns that maybe the U.S. dollar does not have the same influence as a reserve currency as it once did,” he said. “This could mean very bad things for the bond market, which will be very good for gold.”

To illustrate the gold market’s still-untapped potential, Melek highlighted investment demand in gold-backed exchange-traded Funds (ETFs). Although ETFs have seen significant inflows so far this year, gold holdings are still 20% down from their record highs in 2020.

One region that has seen solid investment demand in gold ETFs is China, as investors rush to protect their wealth and purchasing power from the impacts of the global trade war.

While a broad swath of investors continues to ignore gold, Melek noted that there is one segment of the marketplace that is buying as much of the precious metal as it can: central banks.

He said that he expects central banks to continue to buy gold, as nations further diversify away from the U.S. dollar because of the global trade war.

“Central bank will continue to buy gold as they question how reliable the U.S. is as a trading partner,” he said. “We have the U.S. dollar weakening even though the longer end of the yield curve is selling off. That shouldn’t be happening, so there are definitely signs that not all parts of the Treasury curve are traditional safe havens, and gold will benefit from this.”