Goldman Sachs commodity trader: The buying volume of gold on our trading platform continues steadily, and silver is also starting to fluctuate

With funds continuously pouring into gold and silver ETFs, these two major precious metals may still have greater upside potential this year.

Recently, Goldman Sachs analyst Robert Quinn and his team released a report stating that the rise in gold prices has just begun, reiterating their bullish view on gold and maintaining a target of $2700 per ounce by 2025. The reasons are threefold: global central banks continue to buy gold, Fed rate cuts will prompt Western capital to flow back into gold ETFs, and gold provides important hedging value for portfolios to counter geopolitical shocks.

Since mid-August, $3.3 billion has flowed into gold ETFs, with no outflows from GLD and IAU in the past month. Goldman Sachs ETF trading desk wrote in their weekly report:

"The latest information from the trading desk shows an increase in demand for investing in physical gold through ETFs such as GLD, GLDM, and IAU, with demand for gold mining stocks like GDX also on the rise."

Goldman Sachs also mentioned that recently, silver hedge fund long positions have been soaring. The current term structure indicates that the market is not truly tight yet, but the amount of physical silver that sellers and shorts can release is limited. After a certain degree of price decline, silver will also rise rapidly. Due to silver's higher volatility compared to gold, it would not be surprising for silver to significantly outperform gold in the coming year.

Historically, the inflow of funds into US gold ETFs has corresponded with gold prices, but during the 2022 Russia-Ukraine conflict, their relationship began to reverse - gold prices surged significantly, but gold ETF prices continued to decline, clearly decoupling.

Several months later, gold prices entered the second phase, closely related to net gold managed futures positions of hedge funds. Many central banks around the world hide information on gold purchases, but as hedge funds can collect and trade "non-public" central bank information, they have become a barometer and real-time indicator of central bank gold purchases.

Gold prices will continue to soar

As mentioned earlier, gold trading volume continues to rise, and global central banks are continuously buying gold. Since mid-2022, central bank purchases of gold have tripled, and this structural trend will continue. Analyst Tyler Durden stated that it is not surprising for gold to set new highs every day.

And this is just the beginning, another reason for gold prices to take off is the recent "re-calibration" by the Fed. Powell initiated a loose cycle, cutting rates by a significant 50 basis points, exceeding the gold market's expectations, leading to a price surge Dutch cooperative bank analyst Benjamin Picton said:

On Friday, the price of gold hit a new high, closing well above $2600 per ounce. The upward momentum of gold is unstoppable, and the frequency of hitting new highs is increasing. This is not surprising, as the Federal Reserve unexpectedly cut interest rates significantly in a strong economy with high inflation, soaring federal deficits, initiating a loose monetary policy.

In addition to central bank purchases, the safe-haven nature of gold has also made it popular recently. Gold provides important hedging value for investment portfolios to cope with geopolitical shocks such as tariffs, US government debt concerns, US recession risks, etc. Since 2015, gold has risen by 140%.

In addition to fundamentals, there is a more urgent factor driving the rise in gold prices - not only are central banks and hedge funds buying gold like crazy, but the biggest driver of gold's rise before the Russia-Ukraine conflict, ETFs, is now joining the battle! Since the amount of ETF holdings will only gradually increase after the Fed rate cut, this rise has not been fully priced in yet.

As mentioned above, in the past two years, as the price of gold rose, gold ETF holdings decreased, almost absent in the strong rebound of gold in the past two years. But this year, as the price of gold reached a historic high, ETF fund inflows turned positive.

Silver is also rising, may outperform gold in the next year

Quinn stated that with the rise of gold ETFs, silver hedge fund long positions (which played an important role in the silver price over the past two years) are also surging. Quinn observed the following characteristics of the silver market:

Prior to the September Federal Reserve meeting, speculative positions in silver futures surged. Goldman Sachs stated that managed money and non-reportable net longs in silver increased by $2.6 billion between September 17 and September 20, with prices rising by 8%. This was the second largest increase in the past five years, with new longs being the sole driving factor.

Among them, managed money dominates the market. From September 17 to September 20, managed money bought $2.3 billion worth of silver. Since the end of 2019, managed money has bought over $2 billion worth of silver only three times.

Due to continuous tightness in silver supply, coupled with low real interest rates in the US, a weak US dollar, silver prices are rising. Mexican metal mining company Fresnillo emphasized that strong demand for silver is driven by the development of 5G, solar energy, automobiles, and nanotechnology. In addition, the US five-year real interest rate decreased by 8 basis points, and the US dollar index fell by 0.7% After the Fed rate cut, the price of silver continued to rise. From September 17th to September 20th, silver rose by 1.7%.

However, the fund flows showed mixed performance. Goldman Sachs' futures strategist's CTA model showed a trend of increasing positions in silver, yet ETF holders were selling when the price was rising, similar to their behavior towards gold until a few months ago. In addition, the three-month implied volatility decreased, while the standardized 25 delta put/call option spread increased.

In other words, the current term structure indicates that the market is not truly tense yet. In this scenario, the price of silver from December to March actually showed a decline. This is consistent with several indicators - as of September 17th, the short positions of producers, processors, merchants, and users were all below average levels. COMEX inventories have just fallen from a year high. Therefore, despite Fresnillo's statement of strong silver demand, market participants still have the ability to support more speculative long positions.

Of course, just like the surge in gold, the amount of physical silver that sellers and short sellers can release is limited. After the price falls to a certain level, silver will also rise rapidly. The well-known financial blog zerohedge believes that due to silver's higher volatility compared to gold, it would not be surprising if silver significantly outperforms gold in the coming year