Head of Commodity Strategy
Summary: This update was written Thursday before Russia’s overnight attack on Ukraine help drive another upside extension in gold and silver. So the answer to the question is yes, gold can as we projected in our 2022 outlook, mount a challenge at $2000 and beyond. While risk premiums come and go, the latest developments have in our opinion increased the prospect for higher gold and silver prices with rising inflation bringing down growth and with that central banks ability to proceed with the priced in expectations for future rate hikes.
This update was written Thursday before Russia’s overnight attack on Ukraine help drive another upside extension in gold and silver. The text has been left unchanged while the charts and comments at the bottom has been updated. The rally was supported by a drop in US bond yields as investors took shelter from the carnage unfolding in the stock market. Gold priced in euros meanwhile trades near the 2020 high with safe-haven demand more than offsetting the negative impact of a stronger dollar. Gold and silver are likely to remain in demand with bonds struggling to provide the usual safe haven as this conflict comes with even higher inflation as a product. In addition, central banks must balance rate hikes against an accelerated economic slowdown, and any lowering of the current 7 rate hike expectations will further support the metals.
In other words, the Russia Ukraine crisis has turbocharged our belief in higher precious metal prices, not only due to a potential short term safe haven bid, but more importantly due to what this tension will mean for inflation (UP), growth (Down) and central banks rate hike expectations (Fewer).
Gold’s three-week uninterrupted rally has paused after reaching key resistance and following a slight lowering of the geopolitical temperature. In addition, a 130-dollar rally from the January low and a significant outperformance relative to other asset classes, has also created the need for consolidation while pondering the next move.
Prior to the latest run up in prices that was driven by geopolitical tensions over Ukraine and momentum buying from traders focusing on technical breakouts, gold had for several weeks managed to defy gravity amid rising US real yields. Several attempts below $1800 quickly found buyers with physical demand from Asian buyers and central banks providing a bid strong enough to quell selling attempts by traders and algorithmic trading systems focusing on surging real yields.
Gold traders have instead increasingly been focusing on hedging their portfolios against the risk of slowing growth and with that falling stock market valuations as well as increased turbulence in the bond market. Even more aggressive rate hikes may end up being positive for gold as it will further raise the risk of a policy mistake from the Federal Reserve.
Asset managers and hedge funds have responded to these gold-supportive developments by showing renewed interest and following a 9.2-million-ounce reduction last year, total holdings in bullion-backed gold ETFs have started to climb with 2.2 million ounces added so far this year. Leveraged money managers or hedge funds often focus more on momentum than fundamentals and following the recent rejection below $1800 and subsequent technical breakout above $1855, they have shown rising interest with the total net long in COMEX gold futures jumping to a three-month high at 12.6 million ounces, still well below the November peak at 16.4 million, let alone the 2019 record at 29.2 million.
Besides the current geopolitical risk premium which potentially amounts to somewhere around 20 dollars, we maintain our bullish outlook in the belief inflation will remain elevated with rising input costs, wages and rentals being a few components that may not be lowered by rising interest rates. We believe gold is also increasingly being viewed as a hedge against the markets current optimistic view that central banks will be successful in bringing down inflation before slowing growth forces a rethink of the pace of rate hikes and the resulting terminal rate.
Having broken above resistance-turned-support at $1923, the 61.8% retracement of the August-2020 to March 2021 sell off, gold’s advance has paused after running into some profit taking above $1965. However, for now, an RSI close to 80 describes a market in need of consolidation before potentially mounting a challenge at the psychological important $2,000 level.
Silver meanwhile has extended its recent strong run of gains and after pushing above the 200-day moving average yesterday, now support at $24.20, the price has extended above the November high at $24.70 with some resistance now looming at $25.75, the 50% retracement of the 2021 top to bottom sell off. Against gold, the ratio has dropped to a one-month low 77.5 signalling renewed attempt of outperforming, thereby making up for some of the ground that was lost towards the end of last year.
AI: The good, the bad, and the bubble
While a deep recession may not be iminent thanks to central bank policy, interest rates will have to stay high for longer, and this will be accompanied by volatility risk from the unwinding of bubbles, especially within AI.
Steen Jakobsen,
Chief Investment Officer
The emergence of advanced AI systems is by far the most surprising event this year, turning everything upside down, while risks and benefits are debated. AI will also become an arms race between the US and China.
Peter Garnry,
Head of Equity Strategy
As China navigates global fragmentation, its cycle of technology application, productivity enhancement, and growth is threatened by US breakthroughs in generative AI, limited computing power, and geopolitical tensions.
Redmond Wong,
Market Strategist
Japan’s expertise in semiconductors and robotic integration could be the foundation of AI dominance. Combining two of this year's themes, Japanese equities and artificial intelligence, brings a wave of opportunities.
Charu Chanana,
Market Strategist
The AI fever has turned the technology into a darling, pushing crypto further into no-man’s-land. There are striking similarities between AI and crypto, and if these are to come full circle, AI won't be spared for bubbles.
Mads Eberhardt,
Cryptocurrency Analyst
Stocks related to artificial intelligence (AI) have appeared on investors' radars. Expectations are high, but it may be necessary to consider how to get exposure to AI in a diversified way.
Hans Oudshoorn,
Trainer Academy
The USD is on its back foot as markets celebrate an eventual Fed rate peak and steady long US yields. The stakes are even higher for the Japanese yen if longer major sovereign yield curves have to price in economic acceleration.
John J. Hardy,
Head of FX Strategy
While commodities, broadly speaking, have faced some tough months, a partial reversal during June could signal that the asset class is getting back on its feet with energy holding up and precious metals with upside potential.
Ole S. Hansen,
Head of Commodity Strategy
As inflation remains high central banks face hard decisions about whether they should keep hiking interest rates or stop. Meanwhile, the rise of AI creates bubble-like conditions that only make the decision harder.
Althea Spinozzi,
Senior Fixed Income Strategist
