Head of Commodity Strategy
Summary: The rollercoaster ride seen recently in gold and silver highlights the intense focus on yields and the dollar, and the timing of when the Federal Reserve may reach a level of peak hawkishness. While last week's short covering squeeze highlighted the upside potential to prices when the tide turns, all the ducks are not yet lined up properly to support a sustained recovery. In this we focus on the latest developments and why we maintain a longterm bullish outlook for gold and precious metals in general
Commodity markets continue to attract a great deal of directional inspiration from the price action across financial markets with traders and investors trying to gauge the risk and potential depth of an economic slowdown by watching developments in stocks, bonds and forex. A focus which during the past two week sent precious metals on major rollercoaster ride.
Having been under pressure for months in response to hawkish central bank actions to curb inflation through aggressive rate hikes, gold and silver both caught a bid on premature expectations – as it turned out – that the US Federal Reserve was getting close to peak hawkishness. This after a couple of US economic data print at the beginning of the month turned out to be on the weak side. The result was a few days that, until Friday’s stronger-than-expected US job report, saw the dollar and US bond yields trade sharply lower thereby supporting a strong bounce across most metals, both precious and industrial.
Responding to these developments silver, having already found support and started to recover from atwo-year low at $17.60 per ounce reached last month, soared higher with gold following suit. However, while silver reached a four-month high, gold only managed a three-week high at $1730 before reversing lower last Friday.
Looking at recent changes in the Commitment of Traders Reports we can, not surprisingly, conclude that the initial rally was driven by money managers reducing recently established short positions. In the week to October 4 which covered the mentioned rally, the net position held by this group of speculators saw a dramatic shift from the biggest short in almost four years to a small net-long. In silver meanwhile, the change was less severe with traders already holding a small net long when the rally occurred.
ETF holdings, meanwhile, has continued its steady decline, down by around 10% year-to-date, another sign that last week’s bounce was primarily driven by short covering and not a belief that the recovery had started.
What we can conclude from these price movements is that both gold and silver look set to benefit from the eventual turnaround in the dollar and yields, hence the continued focus on inflation and economic data for sign of any weakness to support a shift in the hawkish stance being signalled by the Federal Reserve. The first potential sign came on Monday when Federal Reserve Vice Chair Lael Brainard laid out the case for exercising caution, noting that the previous increases are still working through the economy at a time of high global and financial uncertainty.
Looking ahead we see no reason to change our long-term bullish view on gold with support potentially coming from the risk of a policy mistake sending US economic growth, the dollar and bond yields lower. In addition, we fear that the long-term inflation level may end up at a somewhat higher level than is currently being priced in by the market. Failure to bring long term inflation down towards market expectations may trigger a major, and gold supportive, realignment between (rising) breakeven yields and (falling) real yields.
Gold’s ability to act as a diversifier has increasingly been called into question in recent months with the metal falling despite seeing inflation at the highest level in four decades. Once again, however, it is important to note that gold as an integrated part of financial markets will continue to be impacted by movements and correlations to other markets, especially yields and the dollar. Gold trades down by 9% in a year where the Bloomberg Dollar index trades up 15% and where 10-year US real yields have surged higher by 2.7%, the latter effectively indicating gold should be trading 300 dollars lower at this point.
The reason why it is not in our opinion is the continued demand for an insurance against a policy mistake, higher than expected future inflation and a geopolitical event. All risks worth holding an insurance against, not least considering how poorly other investments such as bonds and stocks have performed this year.
2024: The wasted year
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
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.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
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.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
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/en-gb/legal/disclaimer/saxo-disclaimer)
