Head of Commodity Strategy
Summary: Gold suffered its biggest drop in five months yesterday after the FOMC signaled it would speed up its expected pace of policy tightening. Being the most interest rate and dollar sensitive commodity the yellow metal suffered as the dollar and US real yields both reached two-month highs. Looking ahead continued dollar strength will pose a challenge while gold should be able to withstand rising yields as long it is driven by rising inflation expectations.
Gold suffered its biggest drop in five months yesterday after the FOMC signaled it would speed up its expected pace of policy tightening. Markets were surprised at the scale of the adjustment to the Fed policy forecasts and treasury yields backed up steeply, spooking risk sentiment and taking equities lower, gold sharply lower and sending the USD spiking sharply to the upside.
The headline in today’s podcast says it all: “Time to smell the coffee: The Fed tightening cycle has begun” Although the dot plot is not signaling any rate hikes before 2023, the fact the Fed suddenly signaled willingness to consider tightening was something the non-yielding investment metals struggled to deal with and as a result gold, already on the defensive after getting rejected above $1900, broke down through several key technical support levels.
Gold remains the most interest rate and dollar sensitive commodity, and while the dollar reached a two-month high, it was the movements in Treasury yields that spooked the market. While acknowledging inflation is rising the Fed only lifted their 2022 and 2023 projections by 0.1% to 2.1% and 2.2% respectively. The firm belief inflation will be transitory helped drive a 10 basis point reduction in 10-year breakeven yields. With nominal yields at the same time rising by 10 basis points, most of the damage was seen in real yields which jumped 20 basis points to -0.75%.
While dollar strength will pose a challenge, gold should be able to withstand rising yields as long it is driven by rising inflation expectations. That was, however, not what we saw yesterday, so once again the million dollar question is whether inflation will be a passing phenomenon or longer lasting. For now the market trusts the judgement of the Federal Reserve and until data potentially proves them wrong, gold and with that also silver may face another challenging period.
Gold which wasn’t trading robustly in the days leading up to yesterday’s FOMC meeting took a tumble from the simultaneous moves in dollar and yields. The break below the 200-day moving average at $1838 opened the floodgates with $1825 offering no support before seeing two-way activity close to the next key level just below $1800. With RSI’s getting close to oversold, thereby signaling most of the capitulation selling is done, the $1798 to $1770 range is an area that needs to hold and attract fresh buying in order to avoid a return to the March double bottom. Resistance at $1825, today’s high followed by the mentioned 200-day moving average level at $1838.
AI: The good, the bad, and the bubble
While a deep recession may not be iminent thanks to central bank policy, interest rates will have to stay high for longer, and this will be accompanied by volatility risk from the unwinding of bubbles, especially within AI.
Steen Jakobsen,
Chief Investment Officer
The emergence of advanced AI systems is by far the most surprising event this year, turning everything upside down, while risks and benefits are debated. AI will also become an arms race between the US and China.
Peter Garnry,
Head of Equity Strategy
As China navigates global fragmentation, its cycle of technology application, productivity enhancement, and growth is threatened by US breakthroughs in generative AI, limited computing power, and geopolitical tensions.
Redmond Wong,
Market Strategist
Japan’s expertise in semiconductors and robotic integration could be the foundation of AI dominance. Combining two of this year's themes, Japanese equities and artificial intelligence, brings a wave of opportunities.
Charu Chanana,
Market Strategist
The AI fever has turned the technology into a darling, pushing crypto further into no-man’s-land. There are striking similarities between AI and crypto, and if these are to come full circle, AI won't be spared for bubbles.
Mads Eberhardt,
Cryptocurrency Analyst
Stocks related to artificial intelligence (AI) have appeared on investors' radars. Expectations are high, but it may be necessary to consider how to get exposure to AI in a diversified way.
Hans Oudshoorn,
Trainer Academy
The USD is on its back foot as markets celebrate an eventual Fed rate peak and steady long US yields. The stakes are even higher for the Japanese yen if longer major sovereign yield curves have to price in economic acceleration.
John J. Hardy,
Head of FX Strategy
While commodities, broadly speaking, have faced some tough months, a partial reversal during June could signal that the asset class is getting back on its feet with energy holding up and precious metals with upside potential.
Ole S. Hansen,
Head of Commodity Strategy
As inflation remains high central banks face hard decisions about whether they should keep hiking interest rates or stop. Meanwhile, the rise of AI creates bubble-like conditions that only make the decision harder.
Althea Spinozzi,
Senior Fixed Income Strategist
Disclaimer
The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.
Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-gb/legal/disclaimer/saxo-disclaimer)
