(Kitco News) - The gold market is holding on to solid gains after bouncing off a two-year low at the start of the month. However, one market analyst says that the precious metal is overvalued when looking at the overall macroeconomic landscape.
In an interview with Kitco News, Huw Roberts, head of analytics at Quant Insight, said that gold prices are overvalued by 7.4% according to his firm's modeling. He added that given the current macro environment, gold's fair value is around $1,614 an ounce. The comments come as gold prices last traded at $1,744 an ounce, up roughly 0.20% on the day.
Gold prices have rallied nearly 8% from their two-year low on Nov. 3.
"From our perspective, we would not be chasing gold at these levels," he said.
At the same time, Roberts said that he would also not be looking to fade this rally just yet.
Roberts said that he suspects short-term flow from hedge funds has been the most significant factor behind gold's over-priced move.
"It looks like it's positioning and flow that have driven this rally, not macro fundamentals," he said. “Our modeling shows that macro fundamentals still matter," he said.
Positioning in the futures market would also appear to confirm QI's modeling. The latest data from the Commodity Futures Trading Commission showed that gold's rally has been driven mostly by short-covering.
The COT data shows that money managers bought 5 million ounces of gold in the last two weeks to cover their short positions. During the same period, hedge funds bought 1.7 million ounces in bullish positioning.
Gold-backed exchange-traded funds have also highlighted a lack of bullish interest. As prices rallied, SPDR Shares Gold Shares (NYSE: GLD) saw its holdings fall by 4.6 tonnes.
Roberts said it's not just gold that is overvalued; QI modeling shows most of the commodity sector is overvalued.
"Nickel is screaming expensive and copper is slightly rich according to the modeling," he said. "Silver is a little over fair value but nothing as dramatic as gold. Silver is mostly flatlining."
He also said that mining equities are also currently overpriced.
Roberts said he suspects that shifting expectations that a relatively resilient U.S. economy can help the Federal Reserve achieve a soft landing and avoid a recession as it aggressively raises interest rates is making cyclical assets attractive to some investors.
Roberts noted that QI's modeling doesn't provide economic projections, but measures current conditions and determines fair value based on those factors.
"So quite a few of the cyclicals seem to be discounting a soft landing at the moment and they've overshot relative to fundamentals," he said. "It could be that conditions change, but as it stands, we wouldn't be chasing the commodity or mining sectors at all."