TD Securities’ Senior Commodity Strategist Daniel Ghali warns Gold is increasingly exposed as US 2-year yields break their downtrend and the macro backdrop shifts. He argues the debasement trade is crowded, money supply growth has normalized, rate markets see a prolonged pause, and Fed independence concerns are easing, leaving Gold vulnerable despite ongoing, but slowing, central bank demand.

Crowded debasement trade under pressure

"For the first time in more than a year, US2y yields have broken out of their downward trend, reflecting concerns surrounding Fed policy in a stagflationary shock."

"Gold is vulnerable: (1) The debasement trade has attracted immense participation, with our analysis of 13F filings suggesting that gold is no longer a fringe asset for institutional investors, given the most popular physically-backed gold ETF it is now roughly 67% as widely held by institutional investors as the most popular ETF in history. And yet, (2) money supply growth is trending at a pace that is more commensurate with the economy. (3) Rates markets are pricing in a more prolonged pause, with little room remaining to terminal. (4) Fed independence concerns have been alleviated by recent roadblocks to the Fed Chair confirmation process. (5) A Supreme Court ruling on the Lisa Cook case that is central to independence fears should be resolved within 2-3 months at most."

"The debasement trade is vulnerable, and while central bank buying activity provides an out for investors, the pace of official sector buying activity has declined over the last year. Importantly, the conflict in the Middle East will fuel further declines in official sector purchases, associated with the impact of the war on Gulf nations' economies."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)