Quarterly Outlook
Macro outlook: Trump 2.0: Can the US have its cake and eat it, too?
John J. Hardy
Global Head of Trader Strategy
Global Macro Strategist
We are shorting gold into next week's Federal Open Market Committee meeting; we are also taking an in-depth view on how precious metals have played out so far in this hiking cycle.
Tactical overview
Shorting gold and silver into the previous five FOMC hikes has been a profitable strategy so far.
The average return on gold has been -2.44%, with the range being -0.66% to -4.16%.
The average return on silver has been -4.39%, with the range being -3.35% to -5.75%.
It is worth bearing in mind that the positioning on gold and silver was at extreme net-long levels for quite a few of these meetings.
The market is currently net-long gold and net-short silver; on a five-year average positioning basis, gold is well above the average while silver is below.
As we approach (the near-certain) hike number six on March 21, it's worth noting that gold is holding up well given a combination of retreating US yields, US dollar weakness, and further turbulence around team Trump with the recent firing of ex-secretary of state Rex Tillerson.
Tactical trades with short gold exposure – either outright or through buying puts/put spreads on gold – look compelling, with the Fed being the key trigger next week. Based on the current gold price of $1,328/oz, the implied target range for shorts is from $1,275/oz to $1,316/oz.
It's worth noting that gold has done a good job of bouncing back up and moving to new highs after Fed hikes, which could imply a tactical negative bias going into the meeting that flips over to a positive bias after the meeting.
Key risks
• Contracting US yields seem to be currently supportive of gold.
• A weaker dollar tends to help the precious metals space, as well as commodities in general.
• General risk-off between today and the countdown to the Fed could see a flight to safety into gold and US Treasuries, especially if trade war risks resurface.
• A dovish Fed chair Jerome Powell at next week’s meeting could see a selloff in the US dollar, rates pull back, and gold/silver shoot up.
• Silver’s net-short positioning could make it a candidate for a squeeze.