Commodities 5 minutes to read

What's next for gold after its best quarter since 2017?

Ole Hansen

Head of Commodity Strategy, Saxo Bank Group

Summary:  Trump's trade war and the strong dollar weighed heavily on many commodities in 2018 but these factors also sparked a rush into safe havens, causing gold to shine.


The Bloomberg Commodity Index, which tracks a basket of  major commodity futures, finished 2018 lower by more than 10%. This was the worst year for commodities since 2015 when crude oil got hammered in response to surging US shale production. In 2018 it was not only the sell-off in crude oil on continued shale oil growth and demand concerns which drove the index lower, as losses were seen across all sectors.

Growth, and with that demand worries, caused by President Trump’s trade war with China, rising dollar funding costs and a generally strong dollar, helped send growth-dependent commodities, such as industrial metals sharply lower while creating renewed demand for safe havens, especially gold and with that also silver together with the minnow of palladium where tight supply has lent strong support. 
While still down on the year a late surge helped precious metals end up being the best performing sector in the Bloomberg Commodity Index. Especially the last quarter turned out to be very friendly as the deteriorating outlook for both US and global growth led to speculation that the US Federal Reserve would refrain from hiking interest rates much further. Adding to this was the worst US stock market performance in any December since the 1930s, lower US government bond yields and a weaker dollar, especially against the Japanese yen. 

The table below highlights these developments and the impact on investor behaviour. Those looking for a longer-term bet on gold tend to use exchange-traded funds and this sector saw the biggest increase in total holdings since Q1-2017. Hedge funds, meanwhile, which in early October held a record net-short in COMEX gold futures of 10.3 million ounces, finally turned net-long at the beginning of December. Please note that due to the US government shutdown the CFTC has so far not been able to publish data covering the week the December 24. It is very likely given the current stalemate between Trump and Congress that the report covering the final week of 2018 will also be delayed beyond the usual publication date this Friday. 
The outlook for gold into 2019 looks promising at this stage. We believe that it may take some time for stocks to recover with news from US-China trade negotiations and fourth quarter earnings likely to set the short-term direction. The Federal Reserve is widely expected to further reduce its current call for another two rate hikes this year. The dollar, as usual, holds the key  for gold and at this stage we see the risk of further dollar weakness, although it may not fully emerge before the second half. 

Spot gold is currently testing $1,287/oz, the 61.8% retracement of the 2018 sell-off. While the 14-day RSI at 75 points towards the need for consolidation a break above is nevertheless  likely to attract additional momentum buying. While the current hedge fund position is unknown the relative small net-long on December 18 is likely to have increased further into the quiet Christmas and New Year trading period.
Source: Saxo Bank

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)

Saxo Markets
40 Bank Street, 26th floor
E14 5DA
London
United Kingdom

United Kingdom

Trade Responsibly
All trading carries risk. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more
Additional Key Information Documents are available in our trading platform.

Saxo Markets is a registered Trading Name of Saxo Capital Markets Ltd (‘SCML’). SCML is authorised and regulated by the Financial Conduct Authority, Firm Reference Number 551422. Registered address: 26th Floor, 40 Bank Street, Canary Wharf, London E14 5DA. Company number 7413871.

This website, including the information and materials contained in it, are not directed at, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in the United States, Belgium or any other jurisdiction where such distribution, publication, availability or use would be contrary to applicable law or regulation.

It is important that you understand that with investments, your capital is at risk. Past performance is not a guide to future performance. It is your responsibility to ensure that you make an informed decision about whether or not to invest with us. If you are still unsure if investing is right for you, please seek independent advice. Saxo Markets assumes no liability for any loss sustained from trading in accordance with a recommendation.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc. Android is a trademark of Google Inc.