"The cavalry has arrived!" Deutsche Bank: A turning point has appeared in gold spot funding, with hedge funds, asset management companies, and banks taking turns buying.

"The cavalry has arrived!" Deutsche Bank: A turning point has appeared in gold spot funding, with hedge funds, asset management companies, and banks taking turns buying.

Since late summer, both commercial and retail investors have been continuously reducing their holdings, suppressing spot demand for gold. However, a recent report from Deutsche Bank indicates that this situation is changing.

According to TrendForce, the bank released its latest "dbMetals All Metals Flow Report" on September 3rd, setting the tone for the market with the opening line "Here Comes the Cavalry ." Daniel Ghali, Head of Metals Research, wrote in the report:

Fund flows in the spot gold market have shifted. Previously, commercial and retail investors sold off during the late summer rally, but now non-commercial participants are taking the lead – spearheaded by discretionary hedge funds, asset management firms, and banks – all pointing to strong physical gold demand at current price levels.

Deutsche Bank explicitly named three main groups as the primary buyers: discretionary hedge funds, asset management firms, and banks. Although buying activity has emerged, these buyers' current holdings remain relatively low. The report states:

This aligns with our assessment that discretionary holdings of gold remain insufficient. Evidence from futures and forward curves suggests that the late summer surge was primarily driven by liquidity dynamics, and the unexpected failure of dual financial repression measures to attract large-scale discretionary capital inflows.

Discretionary investors remain underweight across spot, futures, and ETF markets. This may indicate that the real institutional buying spree has only just begun, and the upside potential has yet to be realized .

CTA risks remain; two key price levels need close monitoring.

Deutsche Bank has not shied away from the risks. CTAs (Commodity Trading Advisors/Trend Following Algorithms) are currently in a slight buying position, and commercial selling has subsided. However, the report explicitly warns:

  • A drop below $4,300/ounce could trigger the next round of algorithmic selling, and if coupled with strong non-farm payroll data, there is room for further liquidation.
  • A breakout above $4,700/ounce would trigger a surge of futures funds, with total buying equivalent to +13% of the algorithm's maximum open interest.

Deutsche Bank summarizes the current situation in three points:

  1. The cavalry has arrived.
  2. Discretionary participants are still generally underweight in spot, futures, and ETF markets.
  3. Once it breaks through $4,700, the algorithm will follow up with a buy.

Structural Bull Market: Hormuz is More Important Than the Federal Reserve

Beyond short-term tactical considerations, Deutsche Bank has provided a clear assessment of the long-term logic behind gold.

Analysts point out that the fundamental driver of the structural bull market in gold is reserve diversification, and this logic has transcended the realm of interest rates and prices, extending into the geopolitical arena. He wrote:

In our worldview, the current impact of the Strait of Hormuz conflict on the reserve battle is more critical than Federal Reserve Chairman Warsh's own battle against inflation—it directly relates to the foreign exchange reserve pools of large energy importers and exporters, who are likely to be active participants in the gold market.

Deutsche Bank also emphasized that what drove institutions and reserve managers to seek diversified assets was the multi-year bear market in government bonds, rather than the decline in risk assets.

Regarding energy prices, analysts believe:

The continued rise in energy prices poses a more significant threat than a hawkish Federal Reserve. However, as long as energy prices do not break new highs, the current outlook remains bullish. The market remains concerned about a hawkish Fed, but the next surprise could very well be a strong performance in precious metals.

Other metals: Platinum and palladium face algorithmic selling pressure, while nickel is subject to supply disruptions.

The report also covers fund flows for other metals; key points are as follows:

Platinum and Palladium : The algorithm is extremely biased towards selling. Deutsche Bank estimates that if prices fall, the size of the CTA selling program for platinum could reach -12% to -26% of the algorithm's maximum position in the coming week, while for palladium it could be -18% to -30%.

Aluminum : CTA is slightly biased towards buying, but the asymmetry has been largely resolved, and the direction is expected to be neutral in the coming week.

Nickel : Potential supply disruptions are emerging, but prices are currently reacting with limited impact. Deutsche Bank points out that the LME three-month nickel price of $17,300/ton is the next key level to trigger large-scale CTA buying, with purchases potentially reaching +13% of the algorithm's maximum position. If the risk of water resource disruptions caused by El Niño increases, the CTA buying size could reach +30% in a breakout scenario.

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