Precious metals supported by peak rate speculation

Global Market Quick Take: Europe

Key points in this gold note

• Precious metals have received a bid from the tragic developments in the Middle East and Fed members talking down the need for additional rate hikes
• Peak rate speculation has driven down the one-year funding cost of holding gold and it may signal returning demand from ETF investors
• We maintain a patiently bullish view on investment metals as the timing of a fresh push to the upside remains very US ecnomic data dependent. 

The precious metal sector has recovered strongly following a recent slump which culminated last Friday when another surprisingly strong US job report supported the higher-for-longer narrative and which saw long-end US Treasury yields reach fresh multi-year highs. Since then, however, yields have started to reverse lower driven by the tragic events in the Middle East and comments from several Fed members mentioning the tightening impact of rising bond yields reducing the need from the FOMC to hike rates further. Both developments have forced hedge funds to reverse the recently established net short position back to a long.

In our recently published outlook for the fourth quarter, titled “Bond. Long bond(s)”, our core thesis is that real rates are too positive, creating a fallout from sectors and consumers with refinancing needs. As spending is likely to slow and the US fiscal cycle is turning from tailwind to headwind, the world may indeed have reached ‘peak rates’, providing a four-decade opportunity to go long bonds. On bonds we also noted that, the stagflation risks and ‘higher for longer’ observed through inflation expectations and lately driven by higher energy prices may pose a timing threat to our long bonds theme. However, an economic downturn, as the lagged effects of the recent rate hike cycle kick in, will force central banks into cutting interest rates, lowering the short-end of the US yield curve and, as the effects deepen, the long-end of the yield curve will follow lower, reflecting the need for lower long-term real rates or even negative real rates.

Looking at our gold, and with that also silver, monitor below, we see some encouraging signs emerging, not least the mentioned sharp reversal in long-end bond yields, which has driven some softness in real yields, one of the major long-term drivers for gold, but also the softer dollar and not least traders increasing bets on the number of rate hikes next year. The Secured Overnight Financing Rate futures (SOFR) trade higher this week, signaling a pickup in the expected pace of rate cuts next year. An example being the December 2023 versus December 2024 spread which during the past week has gone from signaling a 75 basis point cut to nearly 100 basis point.