A gold recovery needs drivers to align A gold recovery needs drivers to align A gold recovery needs drivers to align

A gold recovery needs drivers to align

Ole Hansen

Head of Commodity Strategy

Summary:  The rollercoaster ride seen recently in gold and silver highlights the intense focus on yields and the dollar, and the timing of when the Federal Reserve may reach a level of peak hawkishness. While last week's short covering squeeze highlighted the upside potential to prices when the tide turns, all the ducks are not yet lined up properly to support a sustained recovery. In this we focus on the latest developments and why we maintain a longterm bullish outlook for gold and precious metals in general


Commodity markets continue to attract a great deal of directional inspiration from the price action across financial markets with traders and investors trying to gauge the risk and potential depth of an economic slowdown by watching developments in stocks, bonds and forex. A focus which during the past two week sent precious metals on major rollercoaster ride. 

Having been under pressure for months in response to hawkish central bank actions to curb inflation through aggressive rate hikes, gold and silver both caught a bid on premature expectations – as it turned out – that the US Federal Reserve was getting close to peak hawkishness. This after a couple of US economic data print at the beginning of the month turned out to be on the weak side. The result was a few days that, until Friday’s stronger-than-expected US job report, saw the dollar and US bond yields trade sharply lower thereby supporting a strong bounce across most metals, both precious and industrial. 

Responding to these developments silver, having already found support and started to recover from atwo-year low at $17.60 per ounce reached last month, soared higher with gold following suit. However, while silver reached a four-month high, gold only managed a three-week high at $1730 before reversing lower last Friday. 

Looking at recent changes in the Commitment of Traders Reports we can, not surprisingly, conclude that the initial rally was driven by money managers reducing recently established short positions. In the week to October 4 which covered the mentioned rally, the net position held by this group of speculators saw a dramatic shift from the biggest short in almost four years to a small net-long. In silver meanwhile, the change was less severe with traders already holding a small net long when the rally occurred. 

ETF holdings, meanwhile, has continued its steady decline, down by around 10% year-to-date, another sign that last week’s bounce was primarily driven by short covering and not a belief that the recovery had started. 

What we can conclude from these price movements is that both gold and silver look set to benefit from the eventual turnaround in the dollar and yields, hence the continued focus on inflation and economic data for sign of any weakness to support a shift in the hawkish stance being signalled by the Federal Reserve. The first potential sign came on Monday when Federal Reserve Vice Chair Lael Brainard laid out the case for exercising caution, noting that the previous increases are still working through the economy at a time of high global and financial uncertainty. 

Looking ahead we see no reason to change our long-term bullish view on gold with support potentially coming from the risk of a policy mistake sending US economic growth, the dollar and bond yields lower. In addition, we fear that the long-term inflation level may end up at a somewhat higher level than is currently being priced in by the market. Failure to bring long term inflation down towards market expectations may trigger a major, and gold supportive, realignment between (rising) breakeven yields and (falling) real yields.

Gold’s ability to act as a diversifier has increasingly been called into question in recent months with the metal falling despite seeing inflation at the highest level in four decades. Once again, however, it is important to note that gold as an integrated part of financial markets will continue to be impacted by movements and correlations to other markets, especially yields and the dollar. Gold trades down by 9% in a year where the Bloomberg Dollar index trades up 15% and where 10-year US real yields have surged higher by 2.7%, the latter effectively indicating gold should be trading 300 dollars lower at this point. 

The reason why it is not in our opinion is the continued demand for an insurance against a policy mistake, higher than expected future inflation and a geopolitical event. All risks worth holding an insurance against, not least considering how poorly other investments such as bonds and stocks have performed this year. 

Gold in a downtrend since March has settled into a wide $1617 to $1725 range, with support being the 50% retracement of the 2018 to 2022 rally. While we maintain a bullish long-term outlook for gold, a break lower may raise concerns about a double top sending prices even lower. For a change towards a more bullish sentiment to occur the metal first needs to break the downtrend followed by a move above $1735.
Source: Saxo Group
Disclaimer

Saxo Capital Markets (Australia) Limited prepares and distributes information/research produced within the Saxo Bank Group for informational purposes only. In addition to the disclaimer below, if any general advice is provided, such advice does not take into account your individual objectives, financial situation or needs. You should consider the appropriateness of trading any financial instrument as trading can result in losses that exceed your initial investment. Please refer to our Analysis Disclaimer, and our Financial Services Guide and Product Disclosure Statement. All legal documentation and disclaimers can be found at https://www.home.saxo/en-au/legal/.

The Saxo Bank Group entities each provide execution-only service. Access and use of Saxo News & Research and any Saxo Bank Group website are subject to (i) the Terms of Use; (ii) the full Disclaimer; and (iii) the Risk Warning in addition (where relevant) to the terms governing the use of the website of a member of the Saxo Bank Group.

Saxo News & Research is provided for informational purposes, 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. No representation or warranty is given as to the accuracy or completeness of this information. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. No Saxo Bank Group entity shall be liable for any losses that you may sustain as a result of any investment decision made in reliance on information on Saxo News & Research.

To the extent that any content is construed as investment research, such 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.

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments.Saxo Capital Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Capital Markets or its affiliates.

Please read our disclaimers:
- Full Disclaimer (https://www.home.saxo/en-au/legal/disclaimer/saxo-disclaimer)
- Analysis Disclaimer (https://www.home.saxo/en-au/legal/analysis-disclaimer/saxo-analysis-disclaimer)
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)

Saxo Capital Markets (Australia) Limited
Suite 1, Level 14, 9 Castlereagh St
Sydney NSW 2000
Australia

Contact Saxo

Select region

Australia
Australia

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-au/about-us/awards

Saxo Capital Markets (Australia) Limited ABN 32 110 128 286 AFSL 280372 (‘Saxo’ or ‘Saxo Capital Markets’) is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms, Financial Services Guide, Product Disclosure Statement and Target Market Determination to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Saxo Capital Markets does not provide ‘personal’ financial product advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Capital Markets does not take into account an individual’s needs, objectives or financial situation. The Target Market Determination should assist you in determining whether any of the products or services we offer are likely to be consistent with your objectives, financial situation and needs.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website is not intended for residents of the United States and Japan.

Please click here to view our full disclaimer.