Precious metals sell-off extends further
In our latest weekly update, we mentioned how the precious metal sector had finally succumbed to the negative impact of sharply higher bond yields and the stronger dollar. The weakness accelerated this past week with silver and platinum both taking a +6% tumble while the losses in gold were limited to less than 2%.
Looking at the recent rally in bond yields and the dollar, it is difficult to build a bullish case for gold if current developments were the only driver for the yellow metal. However, we do note that while the bear steepening of the US yield curve is weighing on some assets, the recessionary signal it is sending will, if sustained, eventually bring support back to gold, not least from a change in the outlook for short-term rates where the market is still only looking for around three (25 bps) rate cuts during 2024.
In addition, demand for gold as a hedge against a soft-landing failure is likely to strengthen as the outlook for the US economic outlook in the months ahead looks increasingly challenged. With that in mind, we maintain a patiently bullish view on gold with the timing for a fresh push to the upside being very dependent on US economic data as we wait for the FOMC to turn its focus from rate hikes to cuts, and during this time, as seen during the past quarter, we are likely to see continued choppy trade action.
For now, the current cost of holding a gold position for 12 months is close to 5.8%, the bulk of that being the cost of borrowing dollars for one year. Until we see a clear trend towards lower funding rates and/or an upside break forcing a response, real money allocators will be looking for opportunities elsewhere. ETF investors, which include the above mentioned group of real money allocators, have been cutting holdings for the past four months, leaving the total down by 7% during this time to 2717 tons, a +3-1/2-year low.
Central bank buying has, just like last year, been providing a soft floor under the gold market, preventing the price from falling to levels that would otherwise be expected based on the recent bond yield and dollar strength. Silver, meanwhile, is currently hanging on a cliff edge having seen the technical outlook deteriorate, and with gold being supported by central bank demand, silver has been left to take to the full impact of rising bond yields, a stronger dollar and lower industrial metal prices in general. However, based on our outlook for a peak in US rates and stagflation risks, we see the potential for a strong rebound, but first we need to see the dollar, yields and copper stabilise.
From a technical standpoint, gold is showing signs of stabilizing with the US job report and next week’s inflation print both a major focus. The price of spot gold is holding above support at $1805, the February low, and $1787, the 61.8% retracement of the November 2022 to May 2023 rally.