Precious metal section from our latest Commodity Weekly:
Precious metals’ post-U.S. election rally proved short-lived as the Pfizer vaccine news helped alter the short-term outlook. The dollar reversed higher and bond yields jumped while “safe-haven” technology stocks took a hit with the market instead buying the Russell 200 grouping of small-cap stocks, seen as a barometer of the U.S. economy and its potential recovery. Gold got caught up in this large rotation towards value from defensive assets as it forced a recovery in U.S. real rates, a key driver for gold.
We believe that the vaccine will help improve to outlook for 2021 but in the short term politicians and central bankers are likely to panic as the coronavirus case count continues to rise. Something that was highlighted by three of the world’s top central bankers after warning that the prospect of a Covid-19 vaccine isn’t enough to put an end to the economic challenges created by the pandemic.
Additional stimulus when the world is on the cusp of a scientific breakthrough on the vaccine front will likely drive inflation expectations higher next year. Not only due to an over easy liquidity situation but equally important a rise in input cost from increasing food and energy prices. With this in mind, we expect a rise in longer-dated bond yields will primarily be driven by rising inflation expectations which should leave real yields anchored deep in negative territory.
In addition to this, we still see the prospect for the dollar to weaken. Such an event will not only reduce the appetite for “safe-haven” technology stocks priced in dollars, it may also support higher EM growth and with that a pickup in demand for jewellery which suffered a 29% YoY decline in Q3 according to the World Gold Council.
In conclusion, we maintain our bullish outlook for gold and with that the potential for an even greater performance by silver and platinum. The timing of the next move higher remains highly uncertain with the prospect for additional vaccine news driving a deeper correction than the “weak” one already witnessed.