Head of Commodity Strategy
Summary: Gold’s ability to hold support despite multiple challenges was on display once again on Wednesday after the US Federal Reserve delivered a hawkish pause in their aggressive rate hike campaign, while at the same forecasting considerably higher rates over 2024 and 2025 because of a resilient US economy, a strong labor market and sticky inflation. While our gold monitor clearly highlights a whole host of current headwinds, gold has remained resilient with traders and investors seeking a hedge should the Fed fail to deliver a soft landing in coming months.
Global Market Quick Take: Europe
Commitments of Traders: Speculators rush into crude oil futures; Dollar short cut to near neutral
Gold’s ability to hold support despite multiple challenges was on display once again on Wednesday after the US Federal Reserve delivered a hawkish pause in their aggressive rate hike campaign, while at the same forecasting considerably higher rates over 2024 and 2025 because of a resilient US economy, a strong labor market and sticky inflation, recently made worse by an OPEC-supported rise in energy prices. The “dot plot” of rate projections still left the door open for one more hike before yearend while the outlook for rate cuts in 2024 and 2025 was reduced by a half-percentage point, a signal the Fed expects rates to stay higher for longer amid expectations for a soft landing.
The general level of risk appetite received a knock from these projections with stocks selling off, the dollar rallying to trade near a six-month high while the yield on US 2-year Treasuries hit a 2006 high near 5.2%. Traders in the short-term interest rate futures market meanwhile reduced bets on the number of 25 basis-point rate cuts during 1H-2024 to just one from around three last month.
Gold’s response to these price negative developments was a relatively small correction leaving the price still stuck within a narrowing range, currently offering support around $1900.
Our gold monitor below highlights the current headwinds while also pointing to a gold price that has held up very well despite the recent and renewed rise in dollar, yields and lower short term interest rate futures (lower prices equal higher rates). During the past month, gold trades up 1.7% while the dollar has gained 1.4% against a basket of major currencies, ten-year US real yields trade 10 basis point higher while 2024 rate cut expectations have been reduced. In addition, ETF investors have been cutting holdings for the past four months, leaving total holdings down by 169 tons during this time to 2761 tons, a 3-1/2-year low. The leverage fund net long position meanwhile was 50k contracts (5 million ounces) in the week to September 12, just 25k contracts above the March and August lows.
The reason why gold in our opinion has been holding up well despite the mentioned headwinds which also includes the rising opportunity cost of holding a non-interest paying investment like the yellow metal, is likely to be a market in search for a hedge against the FOMC failing to deliver a soft, as opposed to a hard landing. In a recent article in the WSJ, titled “Why a soft landing could prove elusive” Nick Timiraos, the reporter known as the Fed whisper, writes about how almost every hard landing looks at first like a soft landing. He also highlights four developments standing in the way of a soft landing now:
Quite poetically he ends by saying “Planes land. Economies don’t”
Demand for gold as a hedge against a soft-landing failure is unlikely to go away as the outlook for the US economic outlook in the months ahead looks increasingly challenged. With that in mind, we maintain a patiently bullish view on gold and with that also silver and platinum, and we see the yellow metal eventually reaching a fresh record. However, the timing for a fresh push to the upside will remain very US economic data dependent as we wait for the FOMC to turn its focus from rate hikes to cuts, and during this time, as seen during the past quarter, we are likely to see continued choppy trade action.
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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.
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