Head of Commodity Strategy
Summary: Gold blasted through $1835 resistance yesterday after US October CPI recorded the highest print in over 30 years. While the rally was supported by US 10-year real yields, which in the immediate aftermath dropped to a record low, it was the ability to move higher despite seeing the dollar hit a 16 month high that caught some attention. Potentially a sign the market is finally waking up to the fact inflation is a longer-term problem and that gold has some catching up to do relative to current real yield levels.
Gold blasted through $1835 resistance yesterday after US October CPI recorded the highest print in over 30 years. The rally was supported by US 10-year real yields which in the immediate aftermath dropped to a record low at minus 1.25 percent. While the narrative had developed in the wake of the FOMC meeting last week that the Fed would look through high inflation numbers, preferring to focus mostly on the labor market, these numbers were sufficiently hot to jolt the market, raising Fed rate hike expectations for next year.
Gold’s inability to break above $1835 had since July supported a dislocation between rangebound gold and falling real yields. Despite the stronger dollar during this time, it can still be argued that gold has got some catching up to do, with real yields around current levels potentially pointing to a gold price above $1900.
The hot CPI number drove the number of expected 25 basis point rate hikes next year to 2-½ and combined rising long-end bond yields following a disastrous 30-year US Treasury auction, which was sold with the longest tail on record, the dollar jumped across the board. Not least against the euro after the EURUSD broke below the psychological €1.15 level for the first time since July of last year.
Gold’s newfound strength and current ability to weather the strong dollar challenge helped drive gold priced in euros to a one-year high at €1625/oz.
Silver also caught a bid, especially after managing to break the previous double top at $24.86. For now, the break has not resulted in any outperformance against gold with the gold-silver ratio, currently trading around 74.50 and in need of a break below 74 for that to accelerate.
With the US bond market closed for Veteran’s Day, the market will be focusing on whether gold can build on the break or return to test resistance-turned-support in the mentioned $1833-35 area. Also, ETF holdings will now be in focus to see if the break will trigger renewed interest following months of redemptions. Fund managers have increasingly been reducing their gold exposure during the past year as low stock market volatility and rising equity prices reduced the need for diversification. Whether the white hot October US CPI print will change that remains to be seen during the coming weeks.
2024: The wasted year
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Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
