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Gold and silver holding their ground as headwinds rage, Saxo Bank

Although the gold market continues to grind in a narrow trading range, one bank remains impressed with its relative strength even as it prepares to end February with a slight loss.

Ole Hansen, head of commodity strategy at Saxo Bank, said that gold has held up well, given the headwinds it has faced since the start of the year. Spot gold is currently trading around $2,033 an ounce, down only $6 from January’s closing price, even as U.S. 10-year bond yields hold near a two-month high.

“Despite the rising ‘cost’ of holding a non-interest paying gold position and the market’s current obsession with AI-related stocks and cryptos, the yellow metal has done well amid underlying demand for physical gold as well as the softer dollar,” Hansen said in his latest note.

Hansen noted that bond yields remain elevated as market expectations surrounding the Federal Reserve’s monetary policy have shifted significantly this past month. He added that rate cut expectations have been pared back from six at the start of the year to only three. According to the CME FedWatch Tool, markets see a more than 60% chance of a rate cut in June.

This challenging environment has taken its toll on investment demand as the market has seen significant outflows in gold-backed exchange-traded products. He pointed out that 44 tonnes of gold has flowed out of markets in February; 95 tonnes of gold has fled gold ETFs since the start of the year.

Meanwhile, speculative interest in gold has fallen into a predictable pattern, with bullish bets increasing as prices test support at $2,000 an ounce and bearish bets are placed when the price gets close to $2,050 an ounce.

Despite the challenges, Saxo Bank maintains its bullish outlook for gold and silver. The Danish bank sees gold prices pushing to $2,300 an ounce this year. At the same time, Hansen sees the potential for silver to restest its 2001 highs, which are around $30 an ounce.

However, Hansen said that investors need to remain patient.

“We keep a bullish outlook for gold and with that also silver, but as we have highlighted on several occasions in recent months, both metals are likely to remain stuck until we get a better understanding about the delivery of future US rate cuts,” Hansen said in his note. “Until the first cut is delivered, the market may at times run ahead of itself, in the process building up rate cut expectations to levels that leave prices vulnerable to a correction. With that in mind, the short-term direction of gold and silver will continue to be dictated by incoming economic data and their impact on the dollar, yields and not least, rate cut expectations.”

Although investment demand will continue to struggle in the near term, Hansen said that physical demand, led by Asian consumers and central bank purchases, will help maintain gold’s and silver’s solid floors.

Source: Neils Christensen Kitco