COMMODITIES 5 minutes to read

Gold and silver bounce off support, but still lack sparkle

Ole Hansen

Head of Commodity Strategy

Summary:  Precious metals are hardly glistening at present with gold range-bound and awaiting stimulus while silver is hitting lows last seen in 2016.


Gold has managed to put some, albeit small, distance between its current price and $1,200/oz, a support level that was tested during the past three days. The recovery late yesterday afternoon, while coinciding with a big drop in Bitcoin probably had more to do with other developments.

Britain’s Brexit agreement, which was approved by PM May’s cabinet yesterday following a very long meeting, has so far today led to the resignation of three ministers. These developments have seen the dollar regain some of the ground, especially against the euro and sterling, that was lost yesterday when the greenback weakened in response to muted US inflation data and not least comments from Federal Reserve Chairman Powell. In a speech he highlighted the current strength of the US economy while also saying that it could face headwinds next year. The 3-month Eurodollar futures curve flattened further as the expected peak in short-term rates has now seen a 15bp (EDH0) decline during the past week.

Global trade tensions have eased but by no means gone away after Chinese officials outlined a series of potential concessions to the Trump administration. While still falling well short of US demands it highlights the first attempt in months to resolve the trade war. Trump and Xi Jinping are scheduled to meet at the G20 meeting in Buenos Aires in late November and as we approach the date financial markets will anxiously be looking for signs of a breakthrough.

In response to these developments the Chinese renminbi has managed to string together three consecutive days of gains but at 6.94 to the dollar it remains precariously close to the key psychological level of 7 dollars. Since April, gold ‘s fortune has risen and mostly fallen in response to movements in the yuan with both down by more than 10% during this time. 

For now gold remains range-bound and unable to establish a renewed run to the upside. For that to happen we need to see one or more of the following: a geopolitical event, a weaker dollar, a dovish shift in US monetary policy or a prolonged and major sell-off in equities. Resistance remains at $1,240/oz while a break below $1,200/oz could leave it exposed to additional short-term weakness.
Source: Saxo Bank
Silver, meanwhile, managed to recover from multi-year lows after finding buyers below $13.94/oz, the September low. Apart from the softer dollar and bounce in gold, the semi-precious metal also took comfort from a bounce in industrial metals. This was in response to Chinese data which showed a pickup in industrial production and infrastructure investments. The latter potentially leading to stronger demand going forward. 
Source: Saxo Bank
Silver remains historically cheap with the latest weakness triggering another move higher in the gold-silver ratio. Yesterday it hit 86 ounces of silver to one ounce of gold, a 25-year high. During this time frame it has only traded above 83 on three previous occasions in March-16, October-08 and March-95. All of these peaks led to a contraction of the ratio the following months by anywhere between 23 and 30%. 
Source: Bloomberg
Disclaimer

Saxo Capital Markets (Australia) Pty Ltd 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 Combined 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.

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)