Quarterly Outlook
Equity outlook: The high cost of global fragmentation for US portfolios
Charu Chanana
Chief Investment Strategist
Gold too passive, risks deeper correction
Ole Hansen
Head of Commodity Strategy
Summary: Gold as well as silver and platinum have seen renewed weakness following yesterday's FOMC meeting. While the Fed has promised rock-bottom rates for longer than three years, the across market reaction with lower stocks and a stronger dollar, have raised some concerns that the Fed has lost its element of surprise with a tool box looking increasingly empty. With the inflation focus taking a break, the short-term direction is likely to be dictated by movements in US megacap stocks and the dollar.
What is our trading focus?
XAUUSD - Spot gold
XAGUSD - Spot silver
XPTUSD - Spot platinum
XAUXAG - Gold-Silver ratio
IGLN:xlon - iShares Physical Gold
ISLN:xlon - iShares Physical Silver
IPLT:xlon - iShares Physical Platinum
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Gold as well as silver and platinum have seen renewed weakness following yesterday’s FOMC meeting. This after Fed chair Powell, as expected so close to the US elections, refrained from announcing new measures to stimulate and support an economic recovery which he described as still being highly uncertain. While the Fed has promised rock-bottom rates for longer than three years, the across market reaction with lower stocks and a stronger dollar, have raised some concerns that the Fed’s tool box has started to look empty with the element of surprise no longer there.
Gold’s post-FOMC reaction has mirrored the developments seen in weaker stocks and a stronger dollar. It shows that precious metals for now instead of being a safe-haven asset, chase the alternating risk sentiment being reflected through these key markets.
While U.S. ten year real yields, a key driver for gold, continue to stabilized around -1%, the short-term market direction is likely to be dictated by stock and currency market developments. Especially a break in the Nasdaq below 11,000 and a stronger dollar against the euro below €1.17 could increase the risk of a deeper correction in gold than the one seen already down to $1900/oz.
The rising inflation theme that in recent months helped drive demand for gold and inflation protected bonds have started to fade somewhat in recent weeks. This after seeing forward inflation projections move lower after reaching a cycle high at the end of August. Countering this potential short term headwind for gold, it is our worry that the optimistic views on when a vaccine against Covid-19 will be become widely available are too optimistic. With the case count continuing to rise around the world, recently also in the U.S., the global economic recovery look set to slow over the coming months.
With these developments and the potential for a very ‘ugly’ U.S. elections period ahead, we maintain our bullish outlook for gold. In the short-term however the performance of U.S. mega-caps and the dollar hold the key to the direction. As a result we are likely to see the two month consolidation period being extended further.
Gold remains stuck in the $1900’s with local support at $1937/oz ahead of the key $1900/oz level. Three previous lower highs point to fading upside momentum with the market in need of a break above $2000/oz to neutralise it.
Turning our attention to silver we have seen little in terms of fresh input to the market with most of the recent price action being dictated by mentioned outside markets. It is currently stuck in a $26/oz to $27.50/oz range with no major changes seen in its relative value versus gold where the XAUXAG ratio for the past couple of weeks has traded in a very tight range around 72 ounces of silver to one ounce of gold.
Platinum has rallied strongly since the World Platinum Investment Council last week changed its 2020 outlook from a supply surplus to a deficit. Having tried for a couple of days to break a key level against gold it also got hit by profit taking following yesterday’s FOMC meeting. Trading at a discount close to 1000 dollars to gold the metal has yet to challenge the recent highs which are $1005/oz and $1040/oz. For that to happen the XAUXPT ratio probably needs to break below 2, a key area of support where platinum’s further advance has been scuppered on several occasions since May (see small insert chart).
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