Precious metals weakness led by silver

Precious metals weakness led by silver

Strats-Ole-88x88
Ole Hansen

Head of Commodity Strategy

Summary:  Precious metals continue to struggle with rising bond yields a stronger dollar and bouncing stocks further reducing demand for diversification. While gold earlier in the week showed signs of resisting the latest rise in US Treasury yields, both metals led by silver have struggled to put a defense against the stronger dollar. We view the gold-silver ratio at a 14-month high as the markets way to express worries about both inflation and China growth


Precious metals continue to struggle with rising bond yields a stronger dollar and bouncing stocks further reducing demand for diversification. While gold earlier in the week showed signs of resisting the latest rise in US Treasury yields, both metals succumbed to fresh selling yesterday as the dollar broke higher to reach a one-year high. 

Reasons for the current dollar strength may ultimately also support gold from a safe-haven perspective, but for now with both metals on the defensive, speculators see no reason to get involved on the long side until the charts tell them otherwise.

 

  • Fed chair Powell and his counterparts at the ECB, BOJ and BOE all see rising inflation rates around the world as temporary and mostly driven by supply bottlenecks.
  • The Fed is likely to begin scaling back asset purchases in November while the timing of the first-rate hike has been forward to late 2022.
  • In the US, President Biden is struggling to find support for his economic plan while the debt ceiling can have been kicked down the road to December 3
  • China’s factory activity contracted in September as the electricity crunch and fight against pollution has slowed the economy at a time of heightened concerns driven by the Evergrande debt crisis.

These and other recent developments have all joined forces to support the dollar and yield, with silver the hardest hit. After breaking below key support at $22 yesterday it continued lower to reach $21.41, a level last seen some 14 months ago. This move resulted in the gold-silver ratio rising above 80 (ounces of silver to one ounce of gold) for the first time since last November.

30olh_xau
Source: Saxo Group

With close to half of the overall silver demand coming from industrial applications, the current worries about a Chinese slowdown, has hurt the white metal more than gold as investors look for hedges against rising price pressures seen almost everywhere, most recently in the surging cost of energy. So, in short, a higher gold-silver ratio is the markets way to express worries about inflation and China growth.

Gold is not only a metal which tends to respond to movements in the dollar and yields, both of which continue to be price negative. It is also used by fund managers as a hedge or diversifier against risks across financial assets, but with financial assets and market valuations near all-time highs, this demand has faded and become a recent source of selling.

Investors believing the current market confidence and subdued inflation outlook, signaled through the bond market to be misplaced, the cost of buying insurance against it continues to get cheaper with gold presently trading near the lower end of its year-long range. Over the coming weeks we will watch yield developments closely with rising yields potentially raising renewed uncertainty across other asset classes, such as interest rate-sensitive growth stocks. Also, the continued surge in the cost of most energy sources may ultimately support our non-transitory views on inflation.

30olh_xau1
Source: Saxo Group

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)
Full disclaimer (https://www.home.saxo/legal/saxoselect-disclaimer/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.