Gold and silver consolidate with focus on US rates

What are the other precious metal drivers telling us about the current health of the rally?

First of all looking the recent dollar weakness and movements in 10-year real yields it is clear how strong the rally in gold and silver has been, with the normal negative correlations to dollar and yields not explaining the move higher in both. Instead the main driver was last month banking crisis which triggered a major change in the markets expectations for  the direction of US fed funds, from further hikes to aggressive cuts before yearend.

The drop in yields, now partly reversing, helped trigger the first sustained pick-up in demand from financial market participants such as private investors and asset managers. Having been net sellers of exchange-traded funds backed by bullion for the past 11 months, these investors finally saw enough momentum in gold and evidence of trouble elsewhere to tentatively start giving gold a bigger allocation. However, this important investor group has not yet engaged in gold on a level that would seriously push the market higher. Having been net sellers of 465 tons between April 2022 until the banking crisis started last month, total holdings have only managed a 50-ton increase since then.

Speculators in COMEX gold futures also responded to the emerging momentum last month by starting the strongest four-week buying spree since mid-2019. During that period, the net long jumped 121k lots or 12.1 million ounces before some profit taking in the week to April 11 reduced the net long by 7.4k lots to 137.6 lots, some 38k lots below last year's peak that was reached around the time gold hit a $2070 record high.

Gold's recent strength is also being supported by the current outperformance of silver (XAUXAG) and gold mining stocks (GDX:arcx) as shown in the inverted, hence rising ratios below, a development that historically signals a healthy underlying support.

While the short-term outlook points to consolidation and the risk of lower prices before renewed strength, we maintain an overall bullish outlook for investment metals, driven among others by the following developments and expectations:

• Continued dollar weakness as yield differentials continue to narrow.
• Peak Fed rates, when confirmed, have historically on the three previous occasions during the past 20 years supported strong gains in gold in the months and quarters that followed
• Central bank demand look set to continue as the de-dollarization focus continues to attract demand from several central banks. One unknown is how price sensitive, if at all, this demand will be. We suspect it will be limited, with higher prices not necessarily preventing continued accumulation.
• We believe inflation is going to be much more sticky with market expectations for a drop back to 2.5% perhaps being met in the short-term but not in the long-term, forcing a gold supportive repricing of real yields lower.
• A multipolar world raising the geopolitical temperature
• Low investor participation adding support should the above mentioned drivers eventually provide the expected breakout.

Silver (XAGUSD) is holding above $25 ahead of $24.50, an area that provided several tops back in January and February. A deeper correction risk towards $23.72 will depend on the markets continued focus on the risk of higher rates and a slow pace of cuts thereafter.