Head of Commodity Strategy
Summary: For a second month in a row the precious metals sector tops the performance table with a gain around 4%, and while wrong-footed short sellers and geopolitical tensions supported a strong gold rally during October, it was silver's turn to shine this past month thereby allowing it to reclaim lost ground. We maintain a bullish outlook for gold and silver into 2024 in the belief rates have peaked and that Fed funds and real yields will start to trend lower. However, with a great deal of easing already priced into the market the chance of a straight-line rally is unlikely, and both metals will continue to see periods where convictions might be challenged
For a second month in a row the precious metals sector tops the performance table with the Bloomberg Precious metals subindex showing a two-month gain close to 11%, its best back-to-back monthly performance since April. While wrong-footed short sellers and geopolitical tensions supported a strong gold rally during October, silver spent November reclaiming lost ground, driven by its relative cheapness to gold and some traders switching their focus to silver as gold approached $2000 and an area that so far has proven difficult to break above.
The tailwinds that have supported these gains are easy to see, not least this past month, when a growing belief in US peak rates has seen the dollar drop by more than 3% against its major G-10 peers while US 10-notes are on track to celebrate their best month since the 2008 global financial crisis with the yield down 64 basis points so far to 4.28%. A turnaround from last month when it was threatening to break above 5%. The latest trigger came earlier in the week when Fed governor Waller, normally a reliable hawk, suddenly converted to the dovish camp by saying "I am increasingly confident that policy is currently well positioned to slow the economy and get inflation back to 2%,". The market concluded that Waller would not have expressed such a major change in stance without a nod from Fed chair Powell, the result being a market now pricing in five full 25 basis points cuts next year with the through in rate cuts expected around December 2025 at 3.5%.
In our latest precious metal update, we highlighted how gold and silver have seen six years of back-to-back strong December performances with these so-called ‘Santa’ rallies yielding an average return in gold of 4% and 7.25% in silver. Our gold monitor below highlights some of the main drivers for precious metals from movements in the dollar, real yields, cost of carry and the future direction of US Fed Funds. The two bottom charts show the distinct difference in behavior between ETF investors and Futures traders such as hedge funds.
Money managers like hedge funds and CTA’s follow momentum, meaning they buy into strength, like the current rally, while selling into weakness when the market declines. In other words, they are not that sticky and will change positions and direction should the technical and/or fundamental outlook change. Asset managers meanwhile remain sidelined as seen through the small uptick in ETF demand during a period when bullion rallied by more than 200 dollars. An explanation for their hesitancy shall among others be found in the rising gap between gold and US real yields as well as the current high cost of carry which will only come down when the Federal Reserve starts cutting rates. Until then, the rally will not be firing on all cylinders and be exposed to the usual and sometimes deep corrections.
It is also worth mentioning that central bank demand remains very robust and is likely to continue to provide a soft floor under the gold market with total demand in 2023 potentially exceeding last year's record. Central bank buying of gold is one of the reasons the yellow metal during the past year has managed to rally despite surging real yields, and why silver suffered more during periods of corrections as they do not enjoy that constant and underlying demand.
We maintain a bullish outlook for gold into 2024 in the belief rates have peaked and that Fed funds and real yields will start to trend lower. However, with a great deal of easing already priced into the market the chance of a straight-line rally is unlikely, and both silver and gold will continue to see periods where convictions might be challenged.
From a technical standpoint, the 50-day moving average is about to cross above the 200-day, and as long spot gold holds above $2007, the technical setup points to higher prices, with a break above $2063, the August 2020 record closing high signalling the potential for an extension towards $2130.
Silver’s catchup rallies this past month has seen it return to challenge resistance around $25.25 ahead of $26.08, the April to May rally peak. The market has one eye on industrial metals, especially copper which trades near a ten-week peak amid supply disruptions and strong green transition demand, and not least the COP28 Summit in Dubai which following the hottest year ever recorded in human history have seen calls being made for accelerated action to combat an escalating climate crisis. Any agreements that are seen as speeding up the transition towards renewable energy will likely support silver, a critical component in the manufacturing of solar panels, at a time when the supply outlook look set to tighten further.
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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.
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