The gold market is holding solid ground near its highest level in seven weeks even as 10-year U.S. bond yields push closer to 5%.

Gold's resilience comes as the market continues to see lackluster investment demand with solid outflows in gold-backed exchange-traded products. In the past week, as prices have rallied nearly 8% from its recent seven-month lows, the world's largest ETF, SPDR gold Shares, (NYSE: GLD), has seen outflows of more than 17 tonnes.

Despite these outflows, the global gold market remains healthy and robust as growing Asian demand helps to counterbalance weakness in Western markets, according to two market strategists at the World Gold Council.

In an interview with Kitco News on the sidelines of the London Bullion Market Association's 2023 Global Precious Metals Conference, John Reade, chief market strategist and Joseph Cavatoni, North American market strategist at the WGC, said that physical demand in Over-the-Counter (OTC) markets could be playing a significant role in gold's resilient strength.

Both strategists noted that the OTC market is extremely opaque and difficult to judge where the gold is going. However, Reade and Cavatoni said that anecdotal evidence points to the precious metal flowing to Asia at a more significant pace than most analysts and investors think.

"Between Joe and myself, we've probably been to Asia eight times in the last 12 months," said Reade. "This past year, 500 family investment offices were opened in Singapore, compared to about 40 per year pre-COVID,"

Cavatoni added that these family offices have assets under management in the billions of dollars and are starting to look at physical gold bought in the OTC markets as a way to preserve their wealth.

"I think what is driving gold demand in Asia is global geopolitical risks and capital flight being triggered by the prospect of a weak Chinese economy," said Reade.

"Many Chinese investors have built massive real estate positions in their portfolios and now they are looking to diversify and gold is the next logical asset to own," added Cavatoni.

At the same time, Cavatoni said that analysts are probably also underestimating gold demand from major pension funds, sovereign wealth funds and central banks. He added that many of those physical purchases are made in OTC markets and can be extremely difficult to gauge accurately.

"There are certain aspects of the gold market that are a bit softer than I would like to see, but the price is holding up well and that means we are missing something and I think that is all the activity and demand in OTC markets," said Reade.

At the same time, it's not just Chinese investors driving the gold market. Cavatoni said that the WGC has seen rising demand in Japan as gold continues to trade near all-time highs against the yen. He said that Japanese consumers are turning to gold to protect their purchasing power as inflation starts to pick up.

"This could become a significant trend for the global market as Japanese consumers have a lot of cash savings, which makes sense when you have decades of deflation," said Reade.

Although the global gold market is priced in U.S. dollars, both Read and Cavatoni noted the fact that the yellow metal has hit record highs in multiple currencies this past year is a strong signal that global demand remains healthy.

As to when Western investment demand picks up; both strategists said that they are looking to late 2024. Although the Federal is expected to maintain restrictive interest rates through 2024, which could cap gold price gains, Reade and Cavatoni said they don't expect to see any material weakness in the precious metal.

"Maybe demand will be a little bit soft, but we don't expect investors to be selling their gold anytime soon," said Reade.

"We could have a soft market in the first and second quarter of next year, but I think by the second half of the year, the gold market will ripen nicely," added Cavatoni.

Source Kitco

BDST: 1608 HRS, OCT 20, 2023
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