Bank of America's 2024 Gold Analysis Asks Some Questions

Some Keys to Understanding Gold in 2024

Authored by GoldFix ZH Edit:

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Below, we break down and comment (agree to disagree in some spots)  on a  very good report that lays out the framework for the next legs higher in Gold.  (Silver gets a separate, equally impressive analysis tomorrow)

Contents (2000 words):

1. Why Gold Strength Despite High Rates?
2. What Effect Has the Israel-Hamas War Had?
3. Gold Decouples From Oil
4. Did the Runup in Back End Bond Yields Matter?
5. Oil at $150/bbl = Gold at $2,400/oz
6. PDF excerpt

[Headlines, Q&A Format, specific comments, and emphasis added by GoldFix]

1- Why Gold Strength Despite High Rates?

Answer: Perceived Direction of Rates Matters more than rates themselves.

Gold prices have held up against the backdrop of sharply higher US rates in recent weeks. Exhibit 219 highlights that a visible gap has opened up between the assets – a development market participants are increasingly picking up on.

While we acknowledge the dislocation, that chart comes with a significant caveat: Exhibit 220 shows that our traditional gold price model, which runs on US 10-year real rates and the dollar, continues to perform well.

How can that be justified? That model factors in changes of gold prices, rates and the USD, not levels. The bottom line: rates and USD matter, with changes in direction more important than the actual levels. As such, the next leg higher will come when/if  the Fed cuts rate, likely in 2024. Expect more buying in anticipation of an easing event along with stocks, though it still is not a given.

2- What Effect Has the Israel-Hamas War Had?

Answer: fundamentally, almost none; speculatively, a bunch

Of late, gold has rallied as the conflict between Hamas and Israel has escalated. The repricing of gold has been particularly visible in the options space, with risk reversals pushing visibly higher, confirming top-side buying. Not surprisingly, these purchases of optionality have been accompanied by rising vols

[GoldFix Comment: Call skew has increased substantially post the start of the war. This suggests speculative undercapitalized money as opposed to fundamental change. This does not mean it is bad money. It means the investment community is underinvested in this war as being a long-term factor, implying lots of short-term froth for now, no real commitment yet, but room for underlying buying if things deteriorate further. 

Final option comment: Typically options move first when noone believes, but they want to have some on their books “in case”. Consequently, this is to be ignored as a factor either way.

3- Gold Decouples From Oil

Geopolitically, theirs is an accurate assessment in that it is consistent with how Gold behaves in a non-oil threatening war. What is not consistent and very important are the following:

• Gold, The dollar and Oil all rallied when the war began.
• Oil gave all its gains up
• So did the dollar
• But Gold did not give back any of its gains
• Gold historically does not hold gains in War when the oil market isn’t scared.
• WHY DID IT KEEP THEM THIS TIME?

We contend this is the key to understanding the Israel Hamas War and the Geopolitical implications for Gold…

The answer to this question is the key to the next $250 move in gold. We do not have that answer, but believe it is in no small part from the secular dedollarization trends engulfing the world. We are betting on it. (more on this concept later near bottom)

That said, pure directional position-taking has been much more muted. Aggregate investor purchases, visible in faltering demand for physical gold ETFs, remain well below the levels seen since the onset of the Covid pandemic. In our view, this confirms that, beyond an oil-related price spike, the next sustained leg higher in gold prices is unlikely to come until rates start falling

[GoldFix Comment: This is part and parcel of the west being enticed out of metals as an ETF investment even as the East buys them. The promise of western money driving this market higher will be held out more now, but you cannot count on it to be the min driver anymore. Gold could be $300 higher with noone in the US invested. The demand is overseas now. As such, Financial indicators like ETF volumes and Comex Futures Open interest mean less than they used to. Reliable correlations in general are breaking due to changing drivers of demand. Some will never be as reliable as they were again.

This suggests BOA is correct in assuming the next western investment driven leg depends on Fed Policy, not known geopolitics. That is why they are recommending it. Banks feel the fed will ease now. We feel if they do not, gold will drop substantively, and in doing so once again be scooped up by Eastern demand and Western CBs. We are in some ways cheering for the fed to not ease. CONTINUES

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