Head of Commodity Strategy
Summary: Gold trades higher after spending the past couple of weeks fending off sellers looking for lower prices in response to a recent jump in US Treasury yields after the US FOMC kept its hawkish stance. Having found support in the $1900 area, the potential for an upside extension will require continued softness in economic data, starting with today's US inflation print. The limited impact of selling from investors using exchange-traded funds this past month points to demand from others, most likely continued demand from central banks and hedge funds getting back into the market following a period of net selling.
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Global Market Quick Take: Europe
Gold trades higher after spending the past couple of weeks fending off sellers looking for lower prices in response to a recent jump in US Treasury yields after the US FOMC kept its hawkish stance, talking about the need for another two rate hikes before year end to fend off continued inflationary pressures. So far, however, traders have balked at pricing in more than one hike, and together with fresh dollar and yield softness following Friday’s weaker than expected US job report gold has managed to claw back some lost ground, potentially supporting fresh momentum, primarily driven by technical signals and funds reducing bets on lower prices
In Saxo’s recently published Q3-2023 Outlook titled “AI: The good, the bad, and the bubble” I wrote the following section about gold and silver:
Following a strong run-up in prices since November, gold spent most of the second quarter consolidating after briefly reaching a fresh record high. Sentiment is currently challenged by the recent stock market rally and the prospect for additional US rate hikes, thereby delaying the timing of a gold supportive peak in rates. So while the short-term outlook points to further consolidation below 2,000 dollars per ounce as we await incoming economic data, we keep an overall bullish outlook for gold and silver, driven among others by: continued dollar weakness; an economic slowdown, making current stock market gains untenable, leading to fresh safe-haven demand for precious metals; continued central bank demand providing a floor under the market; sticky US inflation struggling to reach the 2.5% long-term target set out by the US Federal Reserve (and if realised, it will likely to trigger a gold-supportive repricing of real yields lower), and a multipolar world raising the geopolitical temperature. In addition, silver may benefit from additional industrial metal strength, which could see it outperform gold. Overall, and based on the expectations and assumptions mentioned, we see the potential for gold reaching a fresh record high above $2100 before year-end.
We are heading into a four-to-six-week period where liquidity tends to dry up as traders and investors leave their offices for a while to enjoy some quality time with families and friends. During this time, lower liquidity can lead to higher volatility as market-related news may trigger a larger than normal price response. Apart from December, July has for the past five years delivered the strongest average return, and whether history can repeat itself will depend on incoming US economic data, starting with Wednesday’s CPI print which is expected to show a decline in headline and core inflation to 3.1% and 5% respectively. If confirmed if may further soften the markets belief in higher US rates and with that the risk of a recession. However, given the current focus on a market supportive slowdown in US inflation, a stronger than expected report may trigger an outsized negative reaction which may challenge gold’s ability to hold onto recent gains.
Investor flows across some of the major commodity Exchange-traded funds show a heavy outflow from gold-backed funds this past month. During this time, as mentioned, the yellow metal has been dealing with rising Treasury yields and stock markets in feisty mood, reducing the need for alternative investment. However, given the rejection below $1900 it highlights underlying demand from others, and with hedge funds holding a near unchanged position during this time the focus once again turns to central bank demand. Not least from the so-called BRICS countries, who according to Russian sources are planning to introduce a new trading currency, which will be backed by gold. While we are highly skeptical about such an attempt to dethrone the dollar, there is little doubt that the de-dollarization demand for gold which led to record central bank buying last year is continuing, thereby helping to provide a soft floor under the gold market. Central bank demand for gold reached 228 tons during Q1’23, a 176% year-on-year increase.
Gold continues to be influenced by movements in the dollar and US Treasury yields, especially real yields, and not least the direction of short-term interest rates set by the US Federal Reserve. In addition, investor flows, especially those from hedge funds or speculators, play a key role in the setting of prices. Regarding the behavior of these it is worth pointing out that instead of causing them, hedge funds & CTA’s and other large speculators tend to anticipate, accelerate and amplify price changes that has been set in motion by fundamentals.
As per the table below, the recent softening in rate hike expectations as seen through the SOFR futures has supported a gold supportive drop in real yields and the dollar. Hedge funds meanwhile had up until the latest reporting week to July 3 been net sellers for eight weeks, in the process reducing their net long by around 40%.
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Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
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