Video length: 1 minute

Q4 Outlook: Weaker dollar propels gold to the next level

Ole Hansen
Head of Commodity Strategy

Summary:  Gold looks set to continue to benefit from numerous tailwinds over the coming months.

The global fiscal panic which we gave special attention in our last quarterly outlook could, over the coming months, be joined by a weaker dollar — as our CIO Steen Jacobsen outlines in the introduction to this outlook for the final quarter of 2019. 

The combination of these two developments will, despite recessionary risks, provide underlying support for metals (industrial and especially precious) as well as key US agricultural commodities depending on a weaker dollar to compete with producers from other regions. 

The energy sector, meanwhile, remains troubled by slowing demand growth. But increased tensions following the Aramco attack should ensure the addition of a geo-political risk premium over the coming months.

Gold, which finally left five years of range-bound trading behind to reach our $1485/oz target, looks set to continue to benefit from numerous tailwinds over the coming months. The Q3 rally was driven by the collapse in global bond yields — without any support from the dollar which strengthened by almost 2% against a basket of major currencies. We maintain a bullish outlook for gold, based on the assumption that the dollar will weaken and global bond yields stay low. 

Following a period of consolidation, gold could move higher to reach $1550/oz by year end before moving higher into 2020. 

The main reasons for maintaining a bullish outlook for gold (as well as silver and platinum), given relative value plays, are:

  • The US Federal Reserve is likely to continue to cut rates, while embarking on another round of quantitative easing 
  • Nominal and real bond yields expected to stay low and, in some places, negative. This removes the opportunity cost associated with holding a non-coupon and non-interest paying asset
  • Continued buying by central banks looking to diversify and, for some, reduce the dependency on the dollar (so-called de-dollarisation)
  • The US-China trade war and geopolitical concerns related to the Middle East provide support for a safe-haven perspective 
  • The dollar, as mentioned, is on its final leg of strength with the emerging risk of US action to weaken it

The biggest risk to rising precious metal prices is the potential that a major trade deal between the US and China will reduce expectations for how much US rates will have to fall. However, looking at the data, credit impulses globally continue to indicate that the economic low point is ahead of us, not behind us. The rapid accumulation of long positions through futures and exchange-traded funds is another potential challenge. Overall, however, the bullish outlook for gold should be able to withstand a correction all the way back to $1384/oz, the level which signalled the breakout of its five-year range. 

Last quarter silver and platinum’s comparative cheapness to gold reached historical levels, before relative value players stepped in to take both metals up 15% in a matter of days. The gold-silver ratio, which measures the number of silver ounces needed to buy one ounce of gold, collapsed from above 93 to near its five-year average at 77 — while platinum saw its discount to gold drop from a record $680/oz to $550/oz.

While there is potential further gold-led upside to both metals, the potential for outperforming further has been reduced. Increased fiscal spending towards infrastructure and fighting climate change would change this outlook back in favour of industrial metals, to which both silver and platinum also belong. 

HG copper remains rangebound with speculators maintaining a short position despite several failed selling attempts. Looking ahead, support will be driven by supply constraints offsetting current demand worries before a pickup in demand occurs. Infrastructure spending and the move towards copper-intensive electrification will only continue to accelerate as the public increasingly calls for action to combat climate change and pollution. We see a wide $2.5/lb to $2.8/lb trading range for the remainder of the year. 

Additional support for industrial metals in general comes from the prospect for a weaker dollar. That would bring relief to emerging-market economies troubled by too much debt: most of it in dollars.

Crude oil remains stuck in a wide range, with the pendulum continuing to swing between the risk of lower demand as global economic activity slows and the risk to supplies from sanctions and conflicts. The IEA sees the risk of a supply glut emerging into 2020 with OPEC and other producers potentially being forced to cut production in order to avoid an even lower price. 

However, the mid-September drone attack on the world’s biggest processing plant in Saudi Arabia showed just how vulnerable the global supply chain can be.  A supply-driven price surge at a time of slowing demand rarely ends well. While we see Brent crude at $60/b by year-end a geo-political risk premium is likely to keep the market higher during the coming weeks until Saudi production normalises, and the threat of a conflict hopefully begins to fade. 

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)

Saxo Capital Markets (Australia) Pty Ltd.
Level 25, 2 Park Street
NSW 2000
Sydney
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) Pty Ltd 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 & Combined Financial Services Guide & Product Disclosure Statement 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. Trading in leveraged products such as CFDs and Margin FX products may result in your losses surpassing your initial deposits. 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.

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.