Gold holds steady despite deleveraging risks in volatile markets

By Ole Hansen, Head of Commodity Strategy at Saxo

The "Magnificent Seven" tech stocks—Apple, Microsoft, Alphabet, Amazon, Meta, Nvidia, and Tesla—were, until very recently, the crown jewels of Wall Street, driving much of the market's gains in 2024 while pulling in billions of dollars from overseas investors looking to join a period of US exceptionalism. However, the tide has turned dramatically in recent weeks, with the Magnificent Seven index plunging into a bear market, falling more than 20% from its highs. The Nasdaq Composite has also seen sharp declines, with tech stocks bearing the brunt of the losses, driven by economic uncertainty and recession fears, forcing high expectations and valuations to meet reality and driving a transition from growth to defensive stocks.

Normally, this is not the way I would start a commodities update. However, given the recent movements across the US stock market and the USD—which has weakened—these developments underpin several of the recent moves across commodities. Capital is flowing out of overpriced US stocks into other regions, while a series of tepid economic reports and the ongoing implementation and subsequent cancellation of US tariffs against major trading partners continue to stress Wall Street. These factors raise demand concerns for some commodities, provide tariff-related support for others, and, overall, maintain a continued focus on safe havens such as gold to mitigate some of these potential dangers—not least the current deleveraging risks, as a recent volatility spike has forced investors to reduce their exposure.

For now, the yellow metal continues to attract demand, with the latest correction attempts being too shallow to force any major reduction risks from managed money accounts that depend on momentum to maintain and build exposure. Gold investment demand has shown some signs of divergence in the past month, with managed money accounts, such as hedge funds and CTAs, reducing bullish bets while demand for bullion-backed ETFs continues at a brisk pace. While hedge funds focus on momentum and short-term technical developments, ETF investors tend to be a bit more sticky, with the latest increase potentially seen as a hedge against stagflation in the US.

Gold investment demand through ETFs and Futures

Beyond geopolitical tensions and the potential breakdown of a world order that has prevailed for generations, traders and investors are also reacting to a sharp and sudden deterioration in US economic data. This has led to increased pricing of stagflation risk—a period characterised by lower growth, rising unemployment, and increasing inflation. Forward-looking indicators suggest these developments could materialise in the coming months, thereby lifting the expected number of 25 basis-point rate cuts this year to more than three from a January low of just one cut.

With that in mind, the outlook for gold remains supportive, particularly given the recent dollar weakness, and the limited depth of the latest correction, where prices have bounced back before getting anywhere near a key area of support between USD 2,790 and USD 2,811. In addition to diversification and safe-haven demand, gold will likely continue to benefit from central bank buying and fiscal debt concerns. Spot gold trades up 11% year-to-date, with the one-year gain approaching 34%, and while we are aware of the risk a deeper correction may unfold, we maintain our recently raised target of USD 3,300.

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