background image background image background image

Fed’s dovish tilt adds fresh fuel to precious metals

Picture of Ole Hansen
Ole Hansen

Head of Commodity Strategy

Summary:  Gold and silver trade sharply higher following the December FOMC meeting where surprisingly dovish comments from Federal Reserve chair Jerome Powell triggered a major drop in bond yields as traders lifted 2024 rate cut expectations from four to six 25 bps rate cuts. With this in mind our belief in even higher precious metal prices next year has only been strengthened with lower real yields and lower funding cost potentially attracting fresh demand from ETF investors who have been net sellers for the past seven quarters.


Key points in this note

  • Gold and silver rally after Fed rate focus changes to cuts from hikes
  • Lower real yields and lower funding cost expected to attract fresh demand through ETFs 
  • Santa rally or not, gold is heading for another strong annual performance

In our latest gold market update we discussed the short-term negative impact on positioning of the early December rally when short covering and ‘fear of missing out’ bids briefly drove gold above $2035 before suffering a +160-dollar reversals. We highlighted the risk the market had reached levels that was hard to align with current fundamentals, not least considering no official nod had yet been given to support the succession of rate cuts priced in by the market.

Yesterday, however, the FOMC declared victory over inflation, and while the change in their dot plot from two to three rate cuts was nothing special, the subsequent comments from Federal Reserve chair Jerome Powell were surprisingly dovish. At the press conference, Powell focused on the risk of causing unnecessary harm to the economy by leaving rates too high as inflation falls. “We’re aware of the risk that we would hang on too long,” he said. “We’re very focused on not making that mistake.”

The market reaction was very decisive with bond yields slumping, not least at the short end where 2-year Treasury notes has seen a two-day decline of 43 basis points to 4.3% while the 10-year benchmark yield trades back below 4% after briefly trading above 5% less than two months ago. While the FOMC Dot plot lifted the number of rate cuts next year to three from two, the swap market went a lot further to price in six rate cuts during the next year to 3.71% with the through in rates expected by December 2026 at 3.16%, a level that given the current inflation projections and expectations for a soft landing should bring rates back to a neutral stance. If, however, the soft-landing turns into a recession, an additional four to six rate cuts may be needed in order to achieve an accommodative policy rate.

14olh_gld1

Small Santa rally ahead of a potential strong year for gold and silver

In this video update we follow up on recent articles which highlighted the fact gold and not least silver had seen strong December returns during the past six years, and wondered whether we would see a repeat this year. Following the recent deep correction, gold has returned to trade near unchanged on the month while silver remains down around 5%. Santa rally or not, gold especially is nevertheless heading for another strong annual performance, currently at 12%, and its best year since 2020 when bullion surged 25%. 

In the months and quarters that followed the start of the three most recent rate cutting cycles, gold performed very well, and the market is likely to gear up for an attempted repeat in the coming months with the first rate cut now priced in to occur at the March meeting. 

We maintain our long-held bullish outlook for gold into 2024, and with the FOMC finally onboard the rate cutting train, the pace of cuts next year will depend on how inflation develops and whether a soft landing can be achieved. In addition, it is also worth mentioning that central bank demand potentially is heading for another record year, with more than 1000 tons being removed from the market for a second year running, thereby providing a soft floor under the gold market. Central bank buying of gold, has according to estimates from the World Gold Council added around 10% to the price this year, and is therefore one of the main reasons the yellow metal has managed to rally despite surging real yields, and why silver suffered more during periods of corrections as they do not enjoy that constant and underlying demand.

In the coming weeks we will be watching ETF flows and look for signs of a change in behavior towards gold from investors who have been net sellers during the past seven quarters. We believe the prospect for lower real yields and lower cost of carry will be the determining factors that eventually will drive fresh demand, and together with continued central bank demand and tactical positioning from hedge funds, the prospect of reaching a fresh record high looks increasingly likely. 

Click here for an updated technical comment on gold and silver from Kim Cramer, our technical analyst. 

14olh_gld2

Quarterly Outlook 2024 Q3

Sandcastle economics

01 / 05

  • 350x200 peter

    Macro: Sandcastle economics

    Invest wisely in Q3 2024: Discover SaxoStrats' insights on navigating a stable yet fragile global economy.

    Read article
  • 350x200 althea

    Bonds: What to do until inflation stabilises

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain inflation and evolving monetary policies.

    Read article
  • 350x200 peter

    Equities: Are we blowing bubbles again

    Explore key trends and opportunities in European equities and electrification theme as market dynamics echo 2021's rally.

    Read article
  • 350x200 charu (1)

    FX: Risk-on currencies to surge against havens

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperform in Q3 2024.

    Read article
  • 350x200 ole

    Commodities: Energy and grains in focus as metals pause

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities in Q3 2024.

    Read article

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/legal/disclaimer/saxo-disclaimer)

Saxo Bank A/S (Headquarters)
Philip Heymans Alle 15
2900
Hellerup
Denmark

Contact Saxo

Select region

International
International

Trade responsibly
All trading carries risk. Read more. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more

This website can be accessed worldwide however the information on the website is related to Saxo Bank A/S and is not specific to any entity of Saxo Bank Group. All clients will directly engage with Saxo Bank A/S and all client agreements will be entered into with Saxo Bank A/S and thus governed by Danish Law.

Apple and the Apple logo are trademarks of Apple Inc, registered in the US and other countries and regions. App Store is a service mark of Apple Inc. Google Play and the Google Play logo are trademarks of Google LLC.