Quarterly Outlook
Macro Outlook: The US rate cut cycle has begun
Peter Garnry
Chief Investment Strategist
Head of Commodity Strategy
Summary: Gold's six week rally continues and together with silver it has broken through a couple of key upside levels. Driven higher by a weaker dollar, stable Treasury yields, Middle East tensions, raised volatility in cryptos together with a general strong appetite for metals. The latter also impacting copper which following a brief pause trades higher on worries elections in Chile and Peru may reduce mining companies ability to increase production.
What is our trading focus?
Spot Gold (Ticker: XAUUSD)
Spot Silver (Ticker: XAGUSD)
Gold/silver ratio (Ticker: XAUXAG
HG Copper (Ticker: COPPERUSJUL21)
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Gold’s six week rally continues and during the past couple of days it has broken a couple of key levels, most noticeable the 200-day moving average and the downtrend from the August 2020 high. It is however also worth noting that since March when the month long slide culminated in a double bottom at $1677/oz, gold has on a number of occasion had silver to thank for being able to penetrate key resistance levels. The most critical being the break above $1800 and yesterday’s rally above the mentioned downtrend.
Silver has since the early April low outperformed gold by 7% with the gold-silver ratio falling from above 70 ounces of silver to one ounce of gold to the current 65.50. Some of that additional support for silver deriving from its industrial link to surging industrial metals such as copper and zinc.
The current rally is being supported by multiple developments with the most important being a weaker dollar and stable US Treasury yields. The latter hiding the fact that rising inflation concerns have seen the 10-year breakeven yield reach an eight year high at 2.56% while the real yield with its often strong inverted correlation to gold has slumped back down towards -1%. In addition to this we have Asian virus woes, Middle East tensions and very high crypto volatility denting this novice sectors store-of-value credentials.
For the rally to extend beyond current levels, U.S. economic data needs to continue the recent downward trajectory. While not reducing gold supportive inflation pressures a corrective period of the U.S. data cycle should continue to hold down U.S. Treasury yields while adding downward pressure on the dollar.
While the current recovery in precious metals began more than six weeks ago, investment flows via bullion-backed exchange-traded funds only turned positive this month with Bloomberg reporting total inflows of 24 tons during the past couple of weeks. From the peak last October to the latest through, total holdings slumped by 377 tons to 3,090 tons. Money managers, who tend to be early movers, also took their time before turning accelerated buyers. Having spent eight weeks since March 9 increasing their net long by 24k lots (2.4 million ounces), they responded to the improved technical outlook by adding 29.5k lots in the last reporting week to May 11, a 45% increase to a 13-week high.
Technical comment on gold (XAUUSD): The yellow metal has now been trading within an uptrend since early April and the accelerated rally since last week’s strong U.S. inflation and weak retail data has resulted in a break above its 200-day moving average ($1845) and 61.8% retracement of the January to April sell-off. The next key upside level of interest being channel resistance and more importantly the 50% retracement of the August to April sell off at $1876. A break higher could see it challenge $1922 next with support at the mentioned $1845 area followed by channel support at $1805.
Technical comment on silver (XAGUSD). In an uptrend since early April with support at the 21-day moving average ($26.80), silver has taken off during the past few sessions to briefly accelerate above its channel ceiling, potentially a sign that a retest of $30 has become more likely. In the short-term it may experience some resistance at $28.90 while trying to establish support, potentially in the $28.30 area.
Copper trades higher and sits just 2.5% below the record from last week with the price continuing to find strong support from the prospect for a strong rebound in global growth and demand together with the green transformation focus. The combination of rising demand and inelastic supply has already seen the price almost double during the past 12 months and given recent developments in South America potential supply issues may become an even bigger source of support during the coming months and years.
This after the recently held Chilean election left power largely in the hands of the left wing. They have proposed a progressive rising tax on Chilean copper sales to a maximum of 75%, a proposal that potentially could be copied by the leading Presidential candidate in Peru. Together these two countries account for around 40% of global supply and mining companies have already warned that such a transfer to the state would leave them struggling to meet future supply growth expectations.
Technical comment on HG Copper (COPPERUSJUL21): After recently reaching 200% of the triangle height formed in March/April the price spent the last week looking for support, something it found at $2.65, the former record high from 2011. Following a minor correction it is likely to make new highs to possibly reach $5.10.
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