Gold and silver consolidate with focus on US rates
After recently reaching a fresh cycle high at $2048/oz, just 22 dollars below the 2022 record peak, gold traders' attention this past week turned to consolidation with the yellow metal drifting back below $2000. Having jumped by 13% since early March when the banking crisis triggered a major change in the outlook for US short-term rates, a correction was long overdue. Silver also encountered some profit taking after surging 31% since early March to reach a one-year high above $26/oz.
Looking at the recent dollar weakness and movements in 10-year real yields, it is clear how strong the rally in gold and silver has been, with the normal negative correlations to dollar and yields not explaining the move higher in both. Instead, last month’s main driver was the banking crisis which triggered a major change in the market's expectations for the direction of US fed funds, from further hikes to aggressive cuts before yearend.
The drop in yields, now partly reversing, helped trigger the first sustained pick-up in demand from financial market participants such as private investors and asset managers via ETFs. Having been net sellers of exchange-traded funds backed by bullion for the past 11 months, these investors finally saw enough momentum in gold and evidence of trouble elsewhere to tentatively start giving gold a bigger allocation. However, this important investor group has not yet engaged in gold on a level that would seriously push the market higher. Having been net sellers of 465 tons between April 2022 until the banking crisis started last month, total holdings have only managed a 50-ton increase since then.
Speculators in COMEX gold futures also responded to the positive price momentum last month by starting the strongest four-week buying spree since mid-2019. During that period, the net long jumped 121k lots or 12.1 million ounces and with the market now consolidation some of these recently established longs are being reduced.
While the short-term outlook points to consolidation and the risk of lower prices, Saxo maintains an overall bullish outlook for investment metals, driven among others by the following developments and expectations:
- Continued dollar weakness as yield differentials continue to narrow.
- Peak Fed rates, when confirmed, have historically on the three previous occasions during the past 20 years supported strong gains in gold in the months and quarters that followed
- Central bank demand look set to continue as the de-dollarization focus continues to attract demand from several central banks. One unknown is how price sensitive, if at all, this demand will be. We suspect it will be limited, with higher prices not necessarily preventing continued accumulation.
- We believe inflation is going to be much stickier with market expectations for a drop back to 2.5% being met in the short-term but not in the long-term, forcing a gold supportive repricing of real yields lower.
- A multipolar world raising the geopolitical temperature
- Low ETF investor participation adding support should the above-mentioned drivers eventually provide the expected breakout.
Having rallied by close to 240 dollars since March 8, the short-term gold market focus has turned to consolidation with the risk of long liquidation from recently established longs weighing on the market. The loss of momentum signalled by the break below the 21-DMA, currently at $1995, may trigger a deeper correction towards the $1955-60 area.