Gold price rally bringing in more momentum traders: Analyst

Gold prices (GC=F) are up by 25% over the last six months, currently hovering above $2,400 per ounce. HSBC Chief Precious Metals Analyst James Steel joins Yahoo Finance to talk about how much higher gold futures could run and where hazards may lie in the precious metal's pricing.

"We pushed it to levels where we've got a lot of momentum trading in now, and I think that's where we have to be somewhat concerned," Steel says. "That if we get some days where things are static, we could easily get a pullback in the price, and in addition, we're seeing a lot of demand destruction on the physical markets going on."

For more expert insight and the latest market action, click here to watch this full episode.

This post was written by Luke Carberry Mogan.

Video transcript

- So let's talk about this run up that we've seen in the price of gold, because we have prices steadying right around those record highs. What do you think the movements of the last few trading days? What does that tell us then about potentially or lack thereof much-- much more room to run here to the upside?

JAMES STEEL: Well, I think you have to look at the-- Thank you for having me, by the way. And I think you have to look at the genesis of the move. And in addition to geopolitical risks which are significant, we've also had a lot of extraneous players coming into the market in the past several months who I think are not so much interested in the price of gold as such, but they wish to hedge their equity exposure.

There's a lot of debate in the equity markets about how high equities can go. And many managers, fund managers, pension managers, et cetera, have no alternative but to be in equities. But they do have a choice about if they hedge, and if they hedge that risk. And gold has a proven safe haven in that regard.

So we pushed it to levels where we've got a lot of momentum trading in now. And I think that's where we have to be somewhat concerned that if we get some days where things are static, we could get a pull-- easily get a pullback in the price.

And in addition, we're seeing a lot of demand destruction in the physical markets going on. Bars coins, jewelry. It's getting very expensive for price sensitive economies to keep buying the underlying physical.

- So is there too much greed in the gold trade right now?

JAMES STEEL: Well, greed's a term that I wouldn't necessarily use. But I think what we've seen is signals that have brought in a lot of momentum traders. And they may or may not be well versed in the fundamentals of gold, but-- but the signals have been there to buy because, as you pointed out, the market's gone to near record highs in nominal-- in nominal terms.

I would point out for your viewers that gold hit $850 an ounce in January of 1980, which if converted into today's dollars is 3,000-- around $3,200. Now, I'm not saying we're going to go there by any stretch of the imagination. So please don't think I am--

But I would point out that, from a real term perspective, we're not at historical highs.

- What do you think these high prices tell us just about the odds that some of these central banks are going to liquidate some of their gold holdings? Does that make it more likely? And I guess, what's the ultimate impact then on the price of gold?

JAMES STEEL: Well, so far they've been good buyers. Almost one out of every 3 ounces of gold that was mined in 2022 went into a central bank and not much less in 2023. Now, I think we have seen some slowness this year. They're aware of the price as well. And it is high.

It's possible that for some gold producing countries we could see some-- central banks have been sellers. The IMF released data couple of days ago that showed a couple of central banks were sellers in March. But I do think, over the long haul, that central banks are on balance, on a committed by program. But they certainly don't have to buy at the rapacious rate they did in the last two years.

- Jim, I'm going to have a cross commodities question for you in our final minute together. We're seeing that the dollar is stronger, yields are higher and gold is rallying. And typically these things are inversely correlated. What do you make of the movement that we're seeing across those different assets?

JAMES STEEL: You're absolutely right and that's a very astute question. And this is not usually a good sign. Right there's a lot of fundamental economic argument, to argue that gold is the world's supreme hard asset, the dollar is the world's supreme paper asset. They should be inverse and they usually are.

And when they both move up together it's usually a sign of elevated risk. But it also doesn't last in the long run.

- All right. Well, we're going to have to leave it there. That was really helpful, Jim. Thank you so much for joining us. Jim Steele HSBC Chief, Precious Metals Analyst.