Gold and silver continue to struggle to find a fresh bid following the early January sell-off that was triggered by rising yields and short covering strengthening the dollar. Instead of a sprint, the prospect for further gains has turned into a marathon and investors will have to be patient with a supportive inflation pick-up not expected before the second quarter and beyond. While total holdings in exchange-traded funds backed by silver reached a record high this past week, speculators in gold have increasingly been voting with their feet and reduced length in gold futures. As mentioned, the week to January 12 saw speculators cut their net long by 31% to nearly the lowest exposure since June 2019.
Hedge funds are generally not ‘married’ to their positions and this often leads to a forceful response when they see a change in the technical and/or fundamental outlook. However, based on our continued bullish views on inflation, we maintain a positive outlook for precious metals but patience is once again being required.
Crude oil’s resilience during the past couple of months has been a major feature and one that has supported stability across commodities. It reached the highest level in a year this past week despite pandemic-led demand concerns, now also in China where lockdowns are spreading ahead of the Lunar New Year holiday. Limiting the downside are the prospects for a vaccine-led recovery in mobility, US stimulus hopes, Saudi Arabia’s unilateral production cuts and a continued strong investor demand for commodities, including oil.
We maintain a long-term bullish view on crude oil, but in the short term, the risk of a +10% correction continues to grow. With this in mind, we keep a close eye on Brent crude where a break below the uptrend from the November low may signal a reversal back towards $49/b.