Macro: Sandcastle economics
Invest wisely in Q3 2024: Discover SaxoStrats' insights on navigating a stable yet fragile global economy.
You can access all of our platforms from a single Saxo account.
Gold looks to the UK and Italy for support
Ole Hansen
Head of Commodity Strategy
Summary: Gold took a beating last week at the hands of US rate hike expectations and unexpectedly strong data. Now, renewed dollar strength against EUR and GBP is keeping the pressure up on the yellow metal.
Gold has dropped to its lowest in a month (-0.3%) and is now looking for support this Monday after breaking below $1,211/oz on Friday. Last week it was the stronger-than-expected US PPI coming just after the Federal Open Market Committee confirmed that further gradual rate hikes are coming that helped send the yellow metal lower. The weakness today has been driven by continued dollar strength, especially against the euro (+0.6%) as the European Commission is ready to escalate its budget battle with Italy. The dollar has also gained versus sterling (+0.8%) as pressure built on the British Prime Minister to ditch her Brexit plan or face defeat in Parliament.
Following on from last Friday’s PPI, the market will be looking ahead to the release of October US CPI on Wednesday. The headline figure is expected to show a year-on-year rise of 2.5%, up from 2.2% in September. The US bond market has not yet bought into a rising inflation outlook with the 10-year breakeven yield having stayed close to 2.1% all year. As a result of this the equivalent 10-year real yield, currently at 1.13% and up from 0.4% at the beginning of the year, has been rising almost in line with the rise in nominal yield. Rising real yields pose a challenge to gold given the opportunity cost of holding an asset that does not pay a coupon or a dividend.
Following on from last Friday’s PPI, the market will be looking ahead to the release of October US CPI on Wednesday. The headline figure is expected to show a year-on-year rise of 2.5%, up from 2.2% in September. The US bond market has not yet bought into a rising inflation outlook with the 10-year breakeven yield having stayed close to 2.1% all year. As a result of this the equivalent 10-year real yield, currently at 1.13% and up from 0.4% at the beginning of the year, has been rising almost in line with the rise in nominal yield. Rising real yields pose a challenge to gold given the opportunity cost of holding an asset that does not pay a coupon or a dividend.
Hedge funds reduced bearish gold bets by 18% during the week to November 6 before the mentioned price weakness ahead of the weekend. ETF investors meanwhile increased total holdings again, albeit at a much reduced rate compared with the previous four weeks.
The political uncertainty, which is the key driver behind today’s dollar strength – note it is trading unchanged against the Japanese yen – has helped cushion gold’s drop with focus now being the area of support between $1,202/oz (50% Fibo) and $1,198/oz (trendline from the August low).
However, keep an eye on silver which after testing resistance last week once again collapsed. It is currently challenging support at $14/oz, and with silver already trading historically cheaply relative to gold, a break below is likely to be felt in gold as well.
Latest Market Insights
Quarterly Outlook 2024 Q3
Sandcastle economics
-
-
Bonds: What to do until inflation stabilises
Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain inflation and evolving monetary policies.
-
Equities: Are we blowing bubbles again
Explore key trends and opportunities in European equities and electrification theme as market dynamics echo 2021's rally.
-
FX: Risk-on currencies to surge against havens
Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperform in Q3 2024.
-
Commodities: Energy and grains in focus as metals pause
Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities in Q3 2024.