Gold price selloff triggers sharp pullback in ASX gold stocks

Gold suffered its largest decline in almost two years overnight on easing tensions in the Middle East, overbought conditions and the increasing likelihood of higher for longer interest rates.

The yellow metal fell 2.75% to US$2,326 an ounce on Monday as concerns of a wider regional conflict between Israel and Iran faded. The selling has continued into the Tuesday session, with prices down a further 0.9% to US$2,305 an ounce as of 2:30 pm AEST.

The S&P/ASX All Ordinaries Gold Index is down 4.3% in afternoon trade, marking its worst session since 5 February 2024.

Both gold and the index is still up around 13% and 19% respectively since March, with gains supported by a broad range of factors including geopolitical risk, central bank buying and physical demand from Chinese consumers.

ASX Gold Performance

The >$1 billion market cap gold names are down an average 3.6% on Tuesday.

Data as at 2:30 pm AEST on Tuesday, 23 April 2024

Performance among stocks within the $1 billion to $100 million market cap range also relatively volatile.

Data as at 2:30 pm AEST on Tuesday, 23 April 2024

Gold's path from here

"We expect gold to make further highs over the coming quarters, following a brief pause in the near term ... we still think that Fed easing and the outlook for lower real rates is still the main driver for bullish gold views," UBS said in a note earlier this month.

"Some profit-taking makes sense after gold’s sharp rally to a new all-time high above the US$2,300 psychological level. But we expect the trend of higher lows and higher highs to continue as interest to buy the dip remains strong."

The note provided a balance viewed as to why gold is set to trend higher but also why this view could be wrong.

Risks to the gold price

"A weaker scenario for gold is if the US economy reaccelerates and the Fed pivots quickly to a hawkish stance. Strong GDP growth implies less of a need for gold as a hedge, while higher real rates would trigger unwinding of gold holdings as the cost of carry becomes more expensive," the analysts said.

They also flagged the possibility of a "buy the rumour and sell the fact" type of situation. The recent gold rally has been frontloaded in anticipation of Fed easing and a period of lacklustre price action could follow the first Fed cut, according to UBS.

On the downside, the risk of a hawkish Fed pivot could bring strength back into the US dollar and weigh on gold. Fed Chair Powell spoke at a discussion panel last week, where he signaled they will likely wait longer than previously anticipated to cut interest rates.

"The recent data have clearly not given us greater confidence and instead indicate that is likely to take longer than expected to achieve that confidence," Powell said in a speech last week.

Raising gold forecasts

UBS expect gold prices to rise to US$2,400 an ounce under its base case (upside of US$2,500 and downside of US$1,900) by year end. The investment bank also lifted its long-term gold price from US$1,600 to US$1,750 to reflect structurally higher productions cost for miners.

While rate cut expectations have progressively been pushed back towards the second half of 2024, we can all agree that the Fed will at some point ... cut interest rates. And when they do, "we find that gold is generally able to sustain gains for two to three quarters after the Fed starts cutting rates, gaining as much as ~9% based on the median using data from the 1980s," the analysts said.

The recent gold rally has also defined soaring bond yields, which typically weigh on bullion prices. UBS believes the lack of an "obvious buyer" suggests that interest has been broad based – pointing to demand from central banks, ETFs, physical demand (i.e. jewelry) and individual investors.

On a side note, Costco recently said it was selling approximately US$200 million worth of gold bars each month, according to the New York Times.

UBS says the investment community is buying gold for several reasons, notably:

• A dovish Fed and upside risks to inflation imply potentially larger declines in real rates

• Persistence of geopolitical risks

• US elections uncertainty and read through for US debt and budget deficit