Safe-Haven Gold Glitters in October on Geopolitical Tensions, Hints at Breakout Potential

Gold prices gained significantly in October, closing out the month at a record high of $1,997 per ounce. This represented a 6.8% monthly return for gold, reversing an early-October slump amid rising geopolitical risks and safe-haven inflows. The strong finish sets the stage for a potential breakout in prices if global tensions continue escalating.

• Gold prices rallied from below $1,850 per ounce in late September to over $2,000 per ounce by late October. The gains occurred across currencies, with October returns of 6.7% in Euros, 8.4% in Yen, and 7.2% in British Pounds.
• The price increase was largely attributed to safe-haven inflows from investors seeking shelter amid heightened geopolitical tensions globally. Flare ups in Israel early in the month were a catalyst.
• COMEX net short positions reversed in early October, a historically positive signal for gold. Net longs increased by 171 tons, equivalent to $11.3 billion. When shorts become overextended, gold often rises over the next 6 months.
• Global gold-backed ETFs continued to see minor outflows in October (-$2.2 billion, -38 tons), but flows leveled off by month-end and turned slightly positive. This could indicate a bottoming of ETF interest.
• Gold may continue rangebound trading absent a strong catalyst like escalating geopolitical risks, a peak in bond yields/dollar, or an equity bear market. But diverse demand can still support prices despite oversimplified notions of gold drivers.

Safe-Haven Inflows Drive October Surge

Gold prices started October on the back foot, having fallen below $1,850 per ounce in late September as the US dollar strengthened. However, geopolitical events on October 7th involving Israel set a rally in motion that propelled the dollar-denominated gold price back above $2,000 per ounce by October 27th.

The record monthly finish for gold was mirrored across major currencies, indicating broad-based safe-haven demand (Table 1). Gold’s price model attributed the bulk of the move to the “residual” factor, likely reflecting elevated geopolitical risks. The large contribution from rising implied volatility and inflation expectations also pointed to safe-haven motives.

In addition to strong implied flows into exchange-traded funds (ETFs), activity in COMEX gold futures provided a boost. Short covering (87 tons) and new long positions (84 tons) in futures drove net longs higher by 171 tons, worth $11.3 billion. This helped propel prices higher. Despite the positive development in futures, global gold ETFs saw minor additional outflows in October (-$2.2 billion, -38 tons), with two-thirds coming from North American funds. However, flows appeared to stabilize by month-end, suggesting potential for a bottoming in ETF demand.

Gold Prices Hit Record Highs in October Across Currencies

COMEX Shorts Reversal Could Signal Further Gains Ahead. The net short position held by managed money traders in COMEX gold futures reached extreme levels in early October, occurring just over a year after the previous overextended shorts episode. These conditions have historically been a reliable positive signal for gold prices over the subsequent 6 months. The shorts reversal in October, alongside the 10% price rally, increases the probability of additional gains ahead.

ETF flows have tended to follow the signals from futures positioning. While ETFs saw minor outflows in October, stabilization late in the month could indicate improving sentiment. With both futures and ETF demand aligning constructively, gold may be positioned for an upside breakout after rangebound trading for much of 2022-2023

However, gold still faces headwinds that could delay a sustainable rally, absent a major catalyst. Real yields remain elevated, the US dollar is still relatively firm, and recession concerns have abated recently. Therefore, most analysts expect continued choppy trading until a decisive trigger emerges.

COMEX Shorts Reversals Historically Positive for Gold, signalling potential trigger for a Breakout

In our assessment, a significant turnaround in gold investment demand will likely require one or more of the following catalysts:

• Worsening Geopolitical Environment: Extended volatility or an escalation of global tensions could undermine economic sentiment, disrupt supply chains, and boost energy prices – potentially pushing developed economies toward stagflation.
• Equity Bear Market: Stock valuations remain stretched while earnings face headwinds. A 20% index decline could motivate investors to seek alternatives like gold.
• Bond Yield/Dollar Peak: If inflation cools sufficiently for bond yields to peak, their real returns may become attractive again, weighing on gold.

Absent these catalysts, rangebound trading is likely to persist in the near term. However, it is important for investors to recognize that gold demand can come from diverse sources, not just ETF and futures interest. This helps explain gold’s resilience amid varying macro drivers.

The Investment Thesis for Gold

For investors evaluating exposure to gold, the following factors are worth considering:

• Gold has proven its ability to maintain value during periods of extreme market turmoil over the past three years. Its role as a hedge should not be underestimated.
• While a decisive breakout catalyst is needed, gold’s trading range has been remarkably steady at around $1,700-$2,050 per ounce since mid-2020. This suggests downside is limited.
• COMEX futures positioning and stabilizing ETF flows indicate mounting institutional interest on dips. This offers technical support.
• Central bank purchases, bar and coin demand in Asia, and OTC investment are providing diversified sources of demand apart from ETFs and futures.
• Gold’s lack of yield is compensated by no credit risk or duration. It provides true diversification as a quasi-currency. A 5-10% allocation can offset portfolio volatility.
• We recommend holding a core strategic position in gold, but also tactically increasing exposure during periods of equity/bond turmoil when gold’s safe-haven attributes shine.

In summary, while gold may tread water in the coming months absent a major catalyst, its impressive resilience and diversified demand profile argue for maintaining a portfolio allocation. For investors concerned about lingering market risks, gold remains a valuable ballast to stabilize returns.

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Some gold companies you should look at:

Karora Resources‍

KaroraResources is a growing gold and nickel producer in Western Australia with its main assets being the Beta Hunt mine, Higginsville operations, and LakewoodMill located near Kalgoorlie. With over 1,900 km of highly prospective land, Karora produced a record 133,836 ounces of gold in 2022 and over 80,000 ounces in the first half of 2023, aiming to reach 170,000-195,000 ounces by 2024. A leader in ESG, Karora achieved carbon neutrality in the past two years. The company believes growing to 200,000 ounces of annual production will re-rate its valuation to the next tier of gold producers, and Karora is debt-free and well-positioned to self-fund growth from operational cash flow.

First Mining Gold

First Mining Gold is a Canadian gold development company focused on advancing its flagship Springpole Gold Project in Ontario, one of the largest undeveloped gold projects in Canada, and the recently acquired Duparquet Gold Project in Quebec, a top 20 Canadian gold asset. The company also has interests in several partnership assets including the Pickle Crow project in Ontario with Auteco Minerals, the Hope Brook project in Newfoundland with Big Ridge Gold, and is the largest shareholder of TreasuryMetals which is advancing the Goliath Gold Complex in Ontario. First Mining was founded in 2015 by Keith Neumeyer, the founding President and CEO of FirstMajestic Silver Corp.

Elemental AltusRoyalties

Elemental Altus Royalties is a rapidly growing gold royalty company providing investors with de-risked, quality investments in top-tier mining companies across four continents. As the only emerging royalty company with material revenue and sustained organic growth, Elemental Altus is backed by the successful Discovery Group and offers a unique combination of innovation, global expertise, and entrepreneurial spirit to conduct complex international tr in the mining sector.