Gold and silver gain further momentum despite headwinds

Global Market Quick Take: Europe
Fixed income update: Geopolitical tensions fail to stall the rise in long-term rates
Commitment of Traders: Heavy gold and crude selling ahead of Middle East tensions spike

Key points in this note

• Gold and silver continue to build on last week’s strong short covering and havenrally as the Middle East conflict intensifies
• With bond yields and the dollar rising at the same time, normal reaction functions have broken down
• Interesting to see whether additional strength will trigger a ‘fear of missing out’ (FOMA) buying response via ETFs

Gold and silver continue to build on last week’s strong short covering and haven rally as the Middle East conflict intensifies. The recent recovery has been even more impressive considering the price negative signals currently being sent from the bond and short-term interest rate markets. Gold reached a four-week high overnight and silver a three-week high after hopes for a diplomatic resolution deteriorated following a deadly explosion at a hospital in Gaza. The threat of an escalation has given a fresh boost to crude oil while demand for hedging and safe havens continue to support precious metals, so much that the Bloomberg Precious metal subindex now tops the performance table this month, up around 5% compared with an almost unchanged energy sector. 

During the same period yields on US 10-year Treasuries have jumped 25 basis points, the 2-year has reached a 2006 high at 5.23% while rate cut expectations between December this year and next has fallen from four to less than three. With the dollar also trading a tad firmer, normal reaction functions have broken down with gold and silver rising despite these headwinds.

Gold has now fully recovered from the recent selloff which took the price down to, but not through key support above $1800. As a result of that weakness, hedge funds ended up holding the biggest net short since last November and as geopolitical tensions rose, so did the urgent need to return positions back to a net long, hence the 5.5% rally last week. What followed this week has been equally impressive with the market only managing a 1% correction from Friday’s $1933 peak before buyers stepped back in. 

It is also worth noting that total holdings in bullion-backed ETFs continue to decline, and with this important part of the “paper” market still in sell mode, the recent bounce has been even more impressive. Asset managers, many of which trade gold through ETF’s, continue to focus on US economic strength, rising bond yields and potentially another delay in peak rates as reasons for not getting involved. These together with the rising cost of funding a non-interest paying precious metal position has been a significant driver behind the year-long reduction in gold positions held by asset managers, and in recent updates we have argued that this trend would likely continued until we see a clear trend towards lower rates and/or an upside break forcing a response from real money allocators. With that in mind it will be interesting to see whether added gold strength, especially through recent highs at $1947.50 and $1953 will trigger a ‘fear of missing out’ (FOMA) buying response.