Fed’s dovish tilt adds fresh fuel to precious metals Fed’s dovish tilt adds fresh fuel to precious metals Fed’s dovish tilt adds fresh fuel to precious metals

Fed’s dovish tilt adds fresh fuel to precious metals

Ole Hansen

Head of Commodity Strategy

Summary:  Gold and silver trade sharply higher following the December FOMC meeting where surprisingly dovish comments from Federal Reserve chair Jerome Powell triggered a major drop in bond yields as traders lifted 2024 rate cut expectations from four to six 25 bps rate cuts. With this in mind our belief in even higher precious metal prices next year has only been strengthened with lower real yields and lower funding cost potentially attracting fresh demand from ETF investors who have been net sellers for the past seven quarters.


Key points in this note

  • Gold and silver rally after Fed rate focus changes to cuts from hikes
  • Lower real yields and lower funding cost expected to attract fresh demand through ETFs 
  • Santa rally or not, gold is heading for another strong annual performance

In our latest gold market update we discussed the short-term negative impact on positioning of the early December rally when short covering and ‘fear of missing out’ bids briefly drove gold above $2035 before suffering a +160-dollar reversals. We highlighted the risk the market had reached levels that was hard to align with current fundamentals, not least considering no official nod had yet been given to support the succession of rate cuts priced in by the market.

Yesterday, however, the FOMC declared victory over inflation, and while the change in their dot plot from two to three rate cuts was nothing special, the subsequent comments from Federal Reserve chair Jerome Powell were surprisingly dovish. At the press conference, Powell focused on the risk of causing unnecessary harm to the economy by leaving rates too high as inflation falls. “We’re aware of the risk that we would hang on too long,” he said. “We’re very focused on not making that mistake.”

The market reaction was very decisive with bond yields slumping, not least at the short end where 2-year Treasury notes has seen a two-day decline of 43 basis points to 4.3% while the 10-year benchmark yield trades back below 4% after briefly trading above 5% less than two months ago. While the FOMC Dot plot lifted the number of rate cuts next year to three from two, the swap market went a lot further to price in six rate cuts during the next year to 3.71% with the through in rates expected by December 2026 at 3.16%, a level that given the current inflation projections and expectations for a soft landing should bring rates back to a neutral stance. If, however, the soft-landing turns into a recession, an additional four to six rate cuts may be needed in order to achieve an accommodative policy rate.

Small Santa rally ahead of a potential strong year for gold and silver

In this video update we follow up on recent articles which highlighted the fact gold and not least silver had seen strong December returns during the past six years, and wondered whether we would see a repeat this year. Following the recent deep correction, gold has returned to trade near unchanged on the month while silver remains down around 5%. Santa rally or not, gold especially is nevertheless heading for another strong annual performance, currently at 12%, and its best year since 2020 when bullion surged 25%. 

In the months and quarters that followed the start of the three most recent rate cutting cycles, gold performed very well, and the market is likely to gear up for an attempted repeat in the coming months with the first rate cut now priced in to occur at the March meeting. 

We maintain our long-held bullish outlook for gold into 2024, and with the FOMC finally onboard the rate cutting train, the pace of cuts next year will depend on how inflation develops and whether a soft landing can be achieved. In addition, it is also worth mentioning that central bank demand potentially is heading for another record year, with more than 1000 tons being removed from the market for a second year running, thereby providing a soft floor under the gold market. Central bank buying of gold, has according to estimates from the World Gold Council added around 10% to the price this year, and is therefore one of the main reasons the yellow metal has managed to rally despite surging real yields, and why silver suffered more during periods of corrections as they do not enjoy that constant and underlying demand.

In the coming weeks we will be watching ETF flows and look for signs of a change in behavior towards gold from investors who have been net sellers during the past seven quarters. We believe the prospect for lower real yields and lower cost of carry will be the determining factors that eventually will drive fresh demand, and together with continued central bank demand and tactical positioning from hedge funds, the prospect of reaching a fresh record high looks increasingly likely. 

Click here for an updated technical comment on gold and silver from Kim Cramer, our technical analyst. 

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.