Head of Commodity Strategy
Summary: Gold’s ability to hold support despite multiple challenges was on display once again on Wednesday after the US Federal Reserve delivered a hawkish pause in their aggressive rate hike campaign, while at the same forecasting considerably higher rates over 2024 and 2025 because of a resilient US economy, a strong labor market and sticky inflation. While our gold monitor clearly highlights a whole host of current headwinds, gold has remained resilient with traders and investors seeking a hedge should the Fed fail to deliver a soft landing in coming months.
Global Market Quick Take: Europe
Commitments of Traders: Speculators rush into crude oil futures; Dollar short cut to near neutral
Gold’s ability to hold support despite multiple challenges was on display once again on Wednesday after the US Federal Reserve delivered a hawkish pause in their aggressive rate hike campaign, while at the same forecasting considerably higher rates over 2024 and 2025 because of a resilient US economy, a strong labor market and sticky inflation, recently made worse by an OPEC-supported rise in energy prices. The “dot plot” of rate projections still left the door open for one more hike before yearend while the outlook for rate cuts in 2024 and 2025 was reduced by a half-percentage point, a signal the Fed expects rates to stay higher for longer amid expectations for a soft landing.
The general level of risk appetite received a knock from these projections with stocks selling off, the dollar rallying to trade near a six-month high while the yield on US 2-year Treasuries hit a 2006 high near 5.2%. Traders in the short-term interest rate futures market meanwhile reduced bets on the number of 25 basis-point rate cuts during 1H-2024 to just one from around three last month.
Gold’s response to these price negative developments was a relatively small correction leaving the price still stuck within a narrowing range, currently offering support around $1900.
Our gold monitor below highlights the current headwinds while also pointing to a gold price that has held up very well despite the recent and renewed rise in dollar, yields and lower short term interest rate futures (lower prices equal higher rates). During the past month, gold trades up 1.7% while the dollar has gained 1.4% against a basket of major currencies, ten-year US real yields trade 10 basis point higher while 2024 rate cut expectations have been reduced. In addition, ETF investors have been cutting holdings for the past four months, leaving total holdings down by 169 tons during this time to 2761 tons, a 3-1/2-year low. The leverage fund net long position meanwhile was 50k contracts (5 million ounces) in the week to September 12, just 25k contracts above the March and August lows.
The reason why gold in our opinion has been holding up well despite the mentioned headwinds which also includes the rising opportunity cost of holding a non-interest paying investment like the yellow metal, is likely to be a market in search for a hedge against the FOMC failing to deliver a soft, as opposed to a hard landing. In a recent article in the WSJ, titled “Why a soft landing could prove elusive” Nick Timiraos, the reporter known as the Fed whisper, writes about how almost every hard landing looks at first like a soft landing. He also highlights four developments standing in the way of a soft landing now:
Quite poetically he ends by saying “Planes land. Economies don’t”
Demand for gold as a hedge against a soft-landing failure is unlikely to go away as the outlook for the US economic outlook in the months ahead looks increasingly challenged. With that in mind, we maintain a patiently bullish view on gold and with that also silver and platinum, and we see the yellow metal eventually reaching a fresh record. However, the timing for a fresh push to the upside will remain very US economic data dependent as we wait for the FOMC to turn its focus from rate hikes to cuts, and during this time, as seen during the past quarter, we are likely to see continued choppy trade action.
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
