Commodity focus: Gold

Ole Hansen

Head of Commodity Strategy

Summary:  Gold continues to look for support amid the recent adversity caused by rising stocks, bond yields and the dollar. While the short-term outlook remains challenging the yellow metal has yet to break levels that would signal a change in the current outlook for higher prices.


Gold took a tumble last week as the market continued to adjust to a continued rise in global stocks and sharp recovery in global bond yields. Key driver for these for gold adverse developments has been continued progress on U.S.-China trade talks and the prospect for a growth stabilising deal being reached. These developments have led to several major investment banks either abandoning long positions or downgrading their 2020 forecast.

The below table shows the challenges gold is currently facing compared with earlier this year.

 

The charts below highlights some of the recent developments across other markets which have led to the current weakness in precious metals. Apart from record highs in U.S. stocks the most important development has been the near one-third collapse in the amount of global negative yielding debt. Since hitting a peak above $17 trillion back in August it has now dropped to $11.6 trillion, a five-months low.

An apparent revolt against negative interest rate policies by central banks, especially in Europe, has led to a major adjustment with the yield on ten-year German government bonds rising from -0.75% to the current -0.25%. Japan, the architect of negative interest rates, has seen its ten-year JGB almost return to 0%, the highest since April.

Meanwhile in the U.S. ten-year yields have almost returned to 2% after rising by more than 50 bp since August. These developments have supported a for gold adverse move higher in real yields while cutting the market expectation for further U.S. rate cuts. So much that the prospect for another rate cut before December 2020 has been slashed to just 58%.

Hedge funds which tend to be the fastest out of the block when it comes to responding to a change in the technical and/or fundamental outlook have so far been relatively slow to react. Before last week’s additional weakness, the fund net-long in COMEX Gold futures was cut to 230,000 lots from 292,000 record six weeks earlier. The latest reduction was primarily driven by fresh short position being added.

Investors using bullion-backed Exchange-traded funds tend to more sticky but last weeks move lower helped trigger a 21-tons reduction to 2538 tons, a one-month low.

Using Fibonacci retracement levels gold has reached its first key level of support just below $1450/oz. A level that represents a 38.2% retracement of the $1266/oz to $1557/oz rally seen between May to August. From a bullish and longer term perspective the key level to focus on remains $1380/oz, the old ceiling which capped the upside from 2016 and June this year.

The recent reduction in speculative longs held by hedge funds have reduced one of the obstacles for a renewed push to the upside. The trigger for renewed gold strength however hinges on the outcome of the current trade talks and incoming economic data from the major economies. While we believe the market may have acted prematurely to the prospect for global growth to recover a renewed push however remains unlikely to happen before year end. We are entering the annual period of “window dressing” where gains are being defended while decisions about new positions are being postponed. Unless a strong signal emerges like last years December stock market sell off. 

Source: Saxo Bank
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