James Steel on Gold Volatility, Geopolitical Risk, and Central Bank Buying

Recent Gold and Silver Market Correction

• ⚡ The recent significant losses in precious metals like gold and silver are attributed to a parabolic rally that invited volatility and profit-taking.
• ⚠️ New market entrants and a rush of money into gold and silver made the market susceptible to corrections on any news counter to the trend.
• 📉 The market experienced an extraordinary correction, with silver wiping out 30% of its value in just three days.

Historical Context of Gold Prices

• 💡 Gold hit new highs last year, but in real terms, the 1980 peak of $850 an ounce (equivalent to about $3,400 today) was higher.
• 🚀 The current rally is more broad-based compared to the limited number of buyers in 1979, particularly the Hunt Brothers in silver.
• 📊 The swing in gold prices over a few days recently was equal to the absolute price of gold when the analyst first started covering the market.

Future Outlook for Gold

• 🎯 The high forecast for gold for the rest of the year is $5,500, with an average near current levels and expectations for a very wide range.
• 💰 A moderately softer dollar and a resumption in greater central bank buying are expected to support gold prices.
• 🏦 Central banks have been a primary driver of the rally, with nearly one in three ounces of gold produced between 2022-2024 going into central bank vaults.

Gold Supply and Recycling Dynamics

• ⏳ Unlike oil or grain, gold is never consumed, meaning existing gold can be mobilized through recycling.
• ⛏️ Bringing new gold to market through mining is a long and capital-intensive process, taking up to 20 years from exploration to final product.
• 📈 While recycling has increased, it hasn't responded as strongly as expected, but a pickup in recycling might occur as prices stabilize.

Economic Impact of Gold Prices

• 💍 Gold prices have a limited direct macroeconomic impact, but they react to macroeconomic conditions and signal geopolitical or economic risks.
• 📉 Jewelry demand, typically around 50% of physical gold demand, was down double digits last year, contributing to a reduction in coin demand as well.
• ⚠️ A persistently high geopolitical risk index suggests that gold prices are reflecting underlying global tensions.