Gold focus remains squarely on trade talk news

Below some of the key charts we currently watch in order to gauge the outlook for gold and with that also silver, the semi-precious kid brother. Speculators have since the October peak cut bullish futures bets by one-third to 206,000 lots (20.6 million ounces). With those now sidelined unlikely to engage unless we see renewed momentum to the upside through a break above $1517/oz, the October high. Non-leveraged investors using bullion-backed exchange traded funds have during the same period only cut total holdings by 1.5%. A relatively small reduction like this confirms our belief that the current correction is a weak one as long the price stays above $1380/oz.

US ten-year real yields remain close to a gold supporting zero while two further 25 bp. US rate cuts are expected during  the next twelve months, two less than what we at Saxo expect. With trade talks and trade war currently attracting so much attention we also need to keep a close eye on the Chinese currency. We use the offshore traded USDCNH in the graph below and we find that the positive correlation between gold and CNH is currently close to the highest since mid-2016. It highlights how the Yuan increasingly has become the trade talks proxy and gold the hedge against a potential fallout.

The outlook for gold remains in our opinion constructive above $1380/oz with the prospect for further upside emerging into 2020. This belief is based on the following assumptions:

• The Federal Reserve has lost control and will cut rates sooner and faster than expected;
• The dollar is potentially on its final leg of strength;
• A prolonged US-China trade war raising inflationary risks;
• Central bank demand to remain strong for various reasons, one being de-dollarization;
• Robust demand for bullion-backed ETF’s.