Goldman Sachs team pointed out in the article that an interesting phenomenon has emerged in the gold market: In the years before the Russia-Ukraine conflict, the correlation between gold prices and gold ETF holdings was indeed very close, but since then, the price of gold has completely lost its correlation with ETF holdings, and is closely related to another data series: the net value of managed funds (i.e. hedge funds) futures.

Hedge funds - perhaps because they have the ability to collect and trade 'non-public' central bank information, have become a barometer and real-time indicator of central bank buying behavior. Therefore, as shown in the following chart, the current spot gold price is directly related to the net gold managed futures (CFCDUMMN).

With ETF fund flows now turning positive, coupled with continued central bank purchases, record Indian gold imports, and unprecedented physical gold demand in the United States, it's no wonder that gold continues to reach historic highs day after day. But this is just the beginning, another reason for gold's surge is the recent 'reset' by the Federal Reserve, where Powell initiated a major rate cut to start a loosening cycle, which gold clearly deems unnecessary, hence the surge in gold. Benjamin Picton of Rabobank said:

Last Friday, the gold price hit a historic high, closing far above the $2600 per ounce mark. At this point, the upward trend in gold seems unstoppable, and reclaiming historical highs has become a common occurrence. Considering the Federal Reserve's massive rate cuts to kick off loosening cycle amid strong economic growth, inflation above target, and the federal deficit at eye-watering levels, perhaps this is not surprising.

Since the Fed rate cut last week, gold has been the second best performing asset, second only to bitcoin.

Putting aside fundamental factors, Goldman Sachs has pointed out a more direct reason for the bullish view on gold: over the past two years, even as the price of gold has risen, the holdings of gold ETFs have been declining, but not anymore.

Since mid-August, gold ETFs have increased by $3.3 billion. In other words, it's not just central banks and hedge funds frantically buying gold: the biggest driving force for gold's rise in the last decade before the Russia-Ukraine conflict — gold ETFs — are also about to join the battle!

As the Goldman Sachs ETF department wrote in its weekly brief report: "Through ETFs like GLD, GLDM, and IAU, and the demand for physical gold exposure by golden minerals companies through GDX has been increasing," therefore, Goldman Sachs' trading department plays a better buyer role in the entire gold market, consistent with the broader market sentiment — there has been no outflow of funds for GLD and IAU in the past month.

At the same time, silver is also showing signs of activity. Goldman Sachs trader Robert Quinn stated that as gold ETFs finally begin to rise, the long positions in silver managed funds (which have been a major driver of gold price for the past two years) are also soaring.

As Quinn observed, ahead of the September Fed meeting, 'speculative positions in silver futures surged, with managed funds taking the lead. With producers reiterating stricter physical balances, lower real U.S. interest rates, and a weaker U.S. dollar became incremental catalysts. Following the Fed's 50-basis-point cut, silver prices continued to rise, but flow indicators are more complex.'

According to the COT report, from September 10th to 17th, as silver prices rose by 8%, net long positions of combined managed funds, other funds, and non-reportable categories increased by $2.6 billion. This is the second largest increase in the past 5 years. The new long positions are the sole driving force. Among these, managed funds took the lead, purchasing $2.3 billion. Since the end of 2019, there have only been 3 instances where managed fund silver purchases exceeded $2 billion.

However, the fund flow situation is mixed. Goldman Sachs' futures strategist CTA model shows an upward trajectory for long positions. Nevertheless, silver ETF holders are still selling off strongly, similar to what they have been doing with gold until their recent surrender in the past few months. This situation for silver ETFs will also not last. Additionally, three months ofImplied volatilityThe decrease and the normalization increase the 25 delta put-call skew. Call options holders may have the opportunity to profit and settle.

Of course, just like gold, sellers and shorts can only sell a limited amount of physical silver, and silver will eventually soar. Due to silver's much higher convexity than gold, it is not surprising that silver's performance in the coming year will significantly outperform gold.

Given the above situation, Goldman Sachs' commodities team emphasizes that the surge in buying silver ETFs has just begun, and reaffirms its "recommendation to go long on gold trading, with a target price of $2,700 per ounce in early 2025", with three reasons:

Goldman Sachs believes that since mid-2022, due to concerns about U.S. financial sanctions and U.S. sovereign debt, the amount of gold purchased by central banks of various countries has doubled, which is structural and will continue regardless of reports.

A Fed rate cut is expected to bring Western capital back to gold ETFs, and during the sharp rebound in gold over the past two years, gold ETFs have largely been absent. Since the ETF's holdings will only gradually increase with the Fed's rate cuts, this upward trend has not been completely priced in yet.

Gold provides significant hedge value for investment portfolios to withstand geopolitical shocks, including tariffs, risks associated with the Fed, debt concerns, and recession risks. Goldman Sachs' analysis suggests that if financial sanctions rise by an equivalent magnitude of 2021, gold prices would have an additional 15% upside; if the U.S. CDS spread widens by 1 standard deviation (13 basis points) amid escalating debt concerns, gold prices would also have a similar upside.

In addition to the technical and liquidity issues mentioned, Goldman Sachs believes that the trend of gold is just beginning.