Head of Commodity Strategy
Summary: Gold and silver continue to build on last week’s strong short covering and haven rally as the Middle East conflict intensifies. The recent recovery has been even more impressive considering the price negative signals currently being sent from the bond and short-term interest rate markets. The threat of an escalation in the Middle East has given a fresh boost to crude oil while demand for hedging and safe havens continue to support precious metals, so much that the Bloomberg Precious metal subindex now tops the performance table this month, up around 5%. Also looking out for a potential 'fear of missing out' response from ETF investors who have continued to sell into the current strength
Gold and silver continue to build on last week’s strong short covering and haven rally as the Middle East conflict intensifies. The recent recovery has been even more impressive considering the price negative signals currently being sent from the bond and short-term interest rate markets. Gold reached a four-week high overnight and silver a three-week high after hopes for a diplomatic resolution deteriorated following a deadly explosion at a hospital in Gaza. The threat of an escalation has given a fresh boost to crude oil while demand for hedging and safe havens continue to support precious metals, so much that the Bloomberg Precious metal subindex now tops the performance table this month, up around 5% compared with an almost unchanged energy sector.
During the same period yields on US 10-year Treasuries have jumped 25 basis points, the 2-year has reached a 2006 high at 5.23% while rate cut expectations between December this year and next has fallen from four to less than three. With the dollar also trading a tad firmer, normal reaction functions have broken down with gold and silver rising despite these headwinds.
Gold has now fully recovered from the recent selloff which took the price down to, but not through key support above $1800. As a result of that weakness, hedge funds ended up holding the biggest net short since last November and as geopolitical tensions rose, so did the urgent need to return positions back to a net long, hence the 5.5% rally last week. What followed this week has been equally impressive with the market only managing a 1% correction from Friday’s $1933 peak before buyers stepped back in.
It is also worth noting that total holdings in bullion-backed ETFs continue to decline, and with this important part of the “paper” market still in sell mode, the recent bounce has been even more impressive. Asset managers, many of which trade gold through ETF’s, continue to focus on US economic strength, rising bond yields and potentially another delay in peak rates as reasons for not getting involved. These together with the rising cost of funding a non-interest paying precious metal position has been a significant driver behind the year-long reduction in gold positions held by asset managers, and in recent updates we have argued that this trend would likely continued until we see a clear trend towards lower rates and/or an upside break forcing a response from real money allocators. With that in mind it will be interesting to see whether added gold strength, especially through recent highs at $1947.50 and $1953 will trigger a ‘fear of missing out’ (FOMA) buying response.
Having left a ten-dollar gab behind at $1845, gold has raced higher, in the proces moving back above its 200-day moving average, last at $1930. A break above $1944, the 50% retracement of the May to October sell off, would put the $1975/80 area into focus. Support for now remains firm ahead of $1900.
Silver trades up around 1.5% with the outperformance compared to gold being supported by a recovery in industrial metals after China growth and retail sales surprises helped lift the sector. However, following the recent sell off which was deeper than gold as the yellow metal received support from continued central bank demand, silver has yet to challenge resistance at the 200-day moving average, currently at $23.34. A break, if successful, would bring the September 22 high at 23.77 back into focus, thereby potentially breaking the succession of lower highs seen since July.
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Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
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