Head of Commodity Strategy
Summary: Gold continues its impressive rally and yesterday it broke back above $1600/oz to reach the highest close since 2013. The recent move has been particular impressive occurring at time when the dollar has been breaking higher against several major currencies. In this update we take a look at why gold remains in demand despite the apparent headwinds.
Gold continues its impressive rally and yesterday it broke back above $1600/oz to reach the highest close since 2013. The recent move has been particular impressive occurring at time when the dollar has been breaking higher against several major currencies. The dollar strength has been particular noticeable against the euro which has dropped to a near 3-year low and in the process gold priced in euros has rallied to a fresh record high at €1490/oz.
The rally has also occurred despite reduced COVID19 fears with the market right or wrongly increasingly adopting a belief that it will primarily be a Q1 event. This on the assumption central banks and governments will do whatever it takes to support a return to trend growth later this year.
So why is gold in demand when other markets are doing better and the dollar is rising? We believe that the combination of additional rate cuts, increased stimulus, negative US real yields and U.S. stocks back to record levels will continue to drive strategic diversification and safe haven demand. Adding to this the potential risk that the virus outbreak may have a longer than expected impact.
January was a particular worrying months for the markets with U.S.-Iran tensions being followed by the virus outbreak. During January total holdings in Exchange-traded funds backed by bullion rose by an average of 1.3 tons/day. So far this February holdings have, despite the mentioned dollar strength and recovering markets, been rising by 1.9 tons/day.
Gold has extended its rally today and reached the January top at $1611/oz. With the metal moving higher, despite the mentioned headwinds from other markets, it is difficult to see what at this stage can halt or pause the rally. Silver which suffered a deeper correction than gold last year has benefited from the ongoing focus on precious metals. Over half of silver demand comes from industrial applications and this is the main reason why it has struggled amid worries about the virus impact on global growth.
However with a lighter position than gold the continued rally has once again helped attract interest from traders looking for relative value. After finding support at $17.50/oz it has spent the past five days outperforming gold with the gold-silver ratio dropping back towards 87 (ounces of silver to one ounce of gold).
Silver may find some resistance ahead of $18.60/oz (dotted line) while gold, for lack of clear technical levels, could be heading towards the next round number at $1650/oz. However having reached resistance at $1611/oz it may pause first in order to gauge the level of support at these higher levels. A small correction could see it test the recent high at $1590/oz.
While total ETF holdings continue to reach new record highs hedge funds have maintained a net-long between 200,000 and 300,000 lots since last October. The latest breakout is likely to attract fresh momentum buying which will be added to the 229,369 lots (22.9 million ounces) they held during the latest reporting week to February 11. The speculative long in silver is significantly lower than gold and at 56,011 lots there is still some room to go before reaching the 2017 record at 99,000 lots.
Bond. Long Bond(s)
With real rates being too positive, we see three scenarios: Opportunity to lock in rates at cycle high, government overreach to keep the economy afloat or a complete reset of the economy.
Steen Jakobsen,
Chief Investment Officer
Is a bond bull market ahead? Inflation still poses a risk for investors, but the moment for increasing duration to your portfolio may be approaching towards the end of the year, when central banks might be forced to cut interest rates.
Althea Spinozzi,
Senior Fixed Income Strategist
The furious rate hike cycle has brought gains in the US dollar, but with stagflation risks in Europe and the UK and weakness in the Chinese economy, USD may have more room to run. But a strong dollar could also have repercussions for US growth, emerging markets and commodity prices.
Charu Chanana,
Market Strategist
With the cost of capital rising painfully, stagflation fears are back, illuminating the fragile state of the green transformation, while giving a tailwind to nuclear power, and threatening the growth of AI-related stocks.
Peter Garnry,
Head of Equity Strategy
With supply tightness not only in energy but all commodities, the momentum in commodity prices may continue, pressuring central banks to lower real rates. That could be a good setup for precious metals, including gold, silver and potentially platinum as well.
Ole S. Hansen,
Head of Commodity Strategy
As the pandemic showed, even the US Treasury can experience seismic shifts. With the government increasing the pace of issuing bonds to support fiscal spending, the complex Treasury market and regulatory constraints could spark a liquidity event.
Redmond Wong,
Market Strategist
The tide has turned for bonds. Given the current yields, bonds have become an attractive investment, with added benefits including lower risk than stocks, increased diversification and a steady stream of income unaffected by economic changes.
Peter Siks,
Investment Coach
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