Will gold and silver see another Santa rally?

Ole Hansen

Head of Commodity Strategy

Summary:  Gold is once again challenging key resistance above $2000 with a break potentially setting up another strong end of year finish, like what both gold and silver saw during the past six years when December ‘Santa’ rallies yielded an average return in gold of 4% and 7.25% in silver. Both metals have thrived during the past month on rising speculation the Federal Reserve has reached the end of the road of its aggressive rate hike regime, and that next year could see a reversal. While we believe the timing of the first rate will be the next major trigger, we may still see a break above $2010 resistance trigger a FOMO (fear of missing out) move higher, potentially supporting a seventh consecutive December of precious metal gains.


Key points in this note

  • Gold is once again challenging key resistance above $2000 with traders on FOMO watch
  • The past six years have seen strong December performances from gold and silver
  • Gold mining stocks are in our opinion undervalued on a relative and absolute basis 

Gold is once again challenging key resistance above $2000 with a break potentially setting up another strong end of year finish, like what both gold and silver saw during the past six years when December ‘Santa’ rallies yielded an average return in gold of 4% and 7.25% in silver. Both metals have thrived during the past month on rising speculation the Federal Reserve has reached the end of the road of its aggressive rate hike regime, and that next year could see a reversal, with a full percent rate cut currently priced in next year with the swaps market seeing the first 25 basis points cut no later than June. 

On the macro-economic front, a variety of recent economic data from key economies around the world has strengthened our long-held view that aggressive policy-tightening cycles from the Federal Reserve and other central banks have ended, with the focus now turning to the timing, as well as the pace, of future rate cuts. However, we also acknowledge that central bankers cannot express this (rate cut) view in public as they would risk boosting risk sentiment to the point it loosens financial conditions too soon. A predicament that was on clear display recently when Federal Reserve chair Jerome Powell was forced to dial back the dovish reprising seen following the November 1 FOMC (Federal Open Market Committee) meeting, when Powell strongly hinted that the Fed is done hiking rates.

Financial markets have responded to these recent developments by sending US long-end Treasury yields sharply lower. The dollar meanwhile has suffered a broad retreat, with the Bloomberg Dollar Index currently hovering near a three-month low, while global equity markets have risen strongly, with the S&P 500 currently showing an 18% year-to-date gain. Recently we have also noticed some renewed interest in beaten down sectors that have struggled amid elevated levels of debt and an increasing cost of servicing that debt. Examples of sectors benefiting has been those related to the renewable energy sector that supports demand for metals such as recently beaten down and under owned silver and platinum. 

Our gold monitor shows how the recent robust performance has left gold prices a bit elevated compared with the corresponding but still supportive moves in dollar and yields, while the cost of carry as seen through a slightly lower yield on 12-month US treasury bills has started to come down. We believe the risk/reward increasingly favours gold, and that the best is yet to come, but for that to happen investors need a stronger conviction on Fed rate cuts in order to attract fresh demand from investors, including long-only asset managers who have been net sellers of ETF’s for months amid the mentioned high cost of carry. 

Total ETF holdings have stabilised during the past month but overall, this year has despite the near 10% gain in spot gold seen a 220 tons reduction, and while a reduction of this size should normally weigh on prices, another source of demand still is extraordinarily strong. In 2022 central banks bought a record 1,136 tons according to the World Gold Council, and with another 800 tons bought in the first three quarters of 2023, this year could potentially end seeing another back-to-back record. Central bank buying has basically put a soft floor under the gold market which has prevented prices from responding negatively to periods of dollar strength and especially rising real yields. 

As mentioned at the top, gold has seen a strong December performance during the past six years with the performance ranging from 2.2% in 2017 and 6.8% in 2020 when silver surged 16.6% higher. The December rally in 2020 was driven by the discovery of the Covid-19 vaccine which lifted the prospect for reopening leading to surging inflation following months of government handouts and central bank rate cuts. While we believe the timing of the first rate will be the next major trigger, we may still see a break above $2010 resistance trigger a FOMO (fear of missing out) move higher, potentially supporting a seventh consecutive December of precious metal gains. 

Source: Saxo

Gold versus gold miners

Gold mining stocks are in our opinion undervalued on a relative and absolute basis, with the underperformance seen this year between spot gold (+9.8%) and the Vaneck Gold Miners UCITS ETF(+1.5%) being down to several factors. The most important being miners struggling to control costs towards labor, fuel, materials during a time when rising interest rates and inflation has added to the overall cost of funding and running a business. Also, increased ESG (Environmental, Social, and corporate Governance) scrutiny by investors, rising regulatory costs and government intervention have also been weighing.

In addition, with traders and investors so far having struggled to see gold break above $2000, each rally towards this area has triggered profit taking in the mining stocks. We see the prospect for lower funding costs next year as well as gold breaking higher as reasons for the mining sector ‘catching’ up. We like the miners as they provide 1) leverage to the gold price, 2) the prospect for rising dividend yields, and 3) current attractive valuations compared to the price of gold.

Quarterly Outlook

01 /

  • Macro Outlook: The US rate cut cycle has begun

    Quarterly Outlook

    Macro Outlook: The US rate cut cycle has begun

    Peter Garnry

    Chief Investment Strategist

    The Fed started the US rate cut cycle in Q3 and in this macro outlook we will explore how the rate c...
  • Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Quarterly Outlook

    Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Althea Spinozzi

    Head of Fixed Income Strategy

  • Equity Outlook: Will lower rates lift all boats in equities?

    Quarterly Outlook

    Equity Outlook: Will lower rates lift all boats in equities?

    Peter Garnry

    Chief Investment Strategist

    After a period of historically high equity index concentration driven by the 'Magnificent Seven' sto...
  • FX Outlook: USD in limbo amid political and policy jitters

    Quarterly Outlook

    FX Outlook: USD in limbo amid political and policy jitters

    Charu Chanana

    Chief Investment Strategist

    As we enter the final quarter of 2024, currency markets are set for heightened turbulence due to US ...
  • Commodity Outlook: Gold and silver continue to shine bright

    Quarterly Outlook

    Commodity Outlook: Gold and silver continue to shine bright

    Ole Hansen

    Head of Commodity Strategy

  • FX: Risk-on currencies to surge against havens

    Quarterly Outlook

    FX: Risk-on currencies to surge against havens

    Charu Chanana

    Chief Investment Strategist

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperfo...
  • Equities: Are we blowing bubbles again

    Quarterly Outlook

    Equities: Are we blowing bubbles again

    Peter Garnry

    Chief Investment Strategist

    Explore key trends and opportunities in European equities and electrification theme as market dynami...
  • Macro: Sandcastle economics

    Quarterly Outlook

    Macro: Sandcastle economics

    Peter Garnry

    Chief Investment Strategist

    Explore the "two-lane economy," European equities, energy commodities, and the impact of US fiscal p...
  • Bonds: What to do until inflation stabilises

    Quarterly Outlook

    Bonds: What to do until inflation stabilises

    Althea Spinozzi

    Head of Fixed Income Strategy

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain ...
  • Commodities: Energy and grains in focus as metals pause

    Quarterly Outlook

    Commodities: Energy and grains in focus as metals pause

    Ole Hansen

    Head of Commodity Strategy

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities i...

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research 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. To the extent that any content is construed as investment research, you must note and accept that the 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 under relevant laws.

Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/legal/disclaimer/saxo-disclaimer)
Full disclaimer (https://www.home.saxo/legal/saxoselect-disclaimer/disclaimer)

Saxo Bank (Schweiz) AG
The Circle 38
CH-8058
Zürich-Flughafen
Switzerland

Contact Saxo

Select region

Switzerland
Switzerland

All trading carries risk. Losses can exceed deposits on margin products. You should consider whether you understand how our products work and whether you can afford to take the high risk of losing your money. To help you understand the risks involved we have put together a general Risk Warning series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. The KIDs can be accessed within the trading platform. Please note that the full prospectus can be obtained free of charge from Saxo Bank (Switzerland) Ltd. or the issuer.

This website can be accessed worldwide however the information on the website is related to Saxo Bank (Switzerland) Ltd. All clients will directly engage with Saxo Bank (Switzerland) Ltd. and all client agreements will be entered into with Saxo Bank (Switzerland) Ltd. and thus governed by Swiss Law. 

The content of this website represents marketing material and has not been notified or submitted to any supervisory authority.

If you contact Saxo Bank (Switzerland) Ltd. or visit this website, you acknowledge and agree that any data that you transmit to Saxo Bank (Switzerland) Ltd., either through this website, by telephone or by any other means of communication (e.g. e-mail), may be collected or recorded and transferred to other Saxo Bank Group companies or third parties in Switzerland or abroad and may be stored or otherwise processed by them or Saxo Bank (Switzerland) Ltd. You release Saxo Bank (Switzerland) Ltd. from its obligations under Swiss banking and securities dealer secrecies and, to the extent permitted by law, data protection laws as well as other laws and obligations to protect privacy. Saxo Bank (Switzerland) Ltd. has implemented appropriate technical and organizational measures to protect data from unauthorized processing and disclosure and applies appropriate safeguards to guarantee adequate protection of such data.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc.