Gold's rally has not stopped, and insufficient holdings hold the potential for new highs

The gold market corrected sharply a day after hitting an intraday record high above $3,500 an ounce, but one market analyst said the rally is far from over as the metal is severely under-owned and remains cheap by some metrics.

Bart Melek, head of commodity strategy at TD Securities (TDS), noted that although gold prices have retreated after hitting a new high of $3,500 an ounce, its rally is not over yet.

Although gold is currently overbought on some technical levels, it is still generally ignored by investors as a whole and holdings are insufficient.

Melek said that the inflation-adjusted gold price can be traced back to the 1970s. The current historical high is about $3,544 per ounce after adjusting for inflation, which can be used as a technical target for gold.

He believes that comparing historical gold prices with the cost curve, gold has further room for growth.

Melek also mentioned that commodity trading advisors (CTAs) are heavily long on gold futures and are in the largest position, which may put short-term pressure on gold, while other discretionary traders have not yet bought gold.

Additionally, one of the reasons non-CTA discretionary traders don’t buy gold is the high arbitrage costs. Melek expects weak economic growth to force the Federal Reserve to cut interest rates, driving new demand for gold.

Although the opportunity cost of holding gold remains high, gold remains an important safe-haven asset, especially when the stock market performs poorly and the influence of the US dollar may weaken, which may be unfavorable for the bond market but favorable for gold.

Melek also emphasized that despite a large amount of funds flowing into gold ETFs this year, holdings are still 20% lower than their 2020 highs, and central banks are buying gold as much as possible as the global trade war prompts countries to diversify and reduce their dependence on the US dollar, and this trend is expected to continue.