Head of Commodity Strategy
Summary: Gold's post FOMC struggle continues with record highs in US stocks, recovering crypto currencies, easing inflation expectations and a dollar trading on the strong side, all playing their part in reducing investment appetite. We take a closer look at the technical setup and the new Basel III regulations and the potential impact on prices
Gold’s post FOMC struggle continues with record highs in US stocks, recovering crypto currencies, easing inflation expectations and a dollar trading on the strong side, all playing their part in reducing investment appetite. Silver meanwhile has settled into a relative tight range with the impact of gold and industrial metal weakness keeping potential buyers sidelined. Short-term focus on whether support below $1770 can hold ahead of Friday’s US job report.
Comment from our technical analyst Kim Cramer Larsen: After breaking the rising channel from the March low, gold traded down in almost straight line to retrace 61.8% of the March to May rally at $1769/oz. A break below last week’s low at $1761 and previous support at $1755 is likely to drive additional price weakness down to around $1734, the 76.4% retracement. If support holds the prospect for a stronger recovery above resistance at $1797 could see it return to a band of moving averages in the $1831-35 area. RSI is in bearish sentiment with no divergence meaning the short-term risk is to the downside.
Basel III: International regulatory framework for banks.
Much attention has been given to new banking rules, part of an international accord known as Basel III, that came into effect yesterday across Europe and by yearend also in the UK. An event that by many has been labelled as a new dawn for gold leading to a major liquidity squeeze that could send the price sharply higher. Whether or not that will be the eventual outcome, there is no doubt the rules will shake up the industry, especially when it comes to how unallocated, or so-called “paper” gold is being treated from a risk perspective.
While classifying gold in physical form as a zero-risk asset in line with cash and currencies, unallocated gold or “paper” gold which banks typically deal with the most will not. The new Net Stable Funding Ratio (NSFR) requirement specifies that an 85% Required Stable Funding (RSF) needs to be held by banks against the financing and clearing of precious metals transactions in unallocated gold. Previously it was zero and as a result it will increase the cost of holding unallocated gold and it will most likely lead to lower activity while making physical gold more attractive and less exposed to hedging or selling activities.
In addition and given its risk-free status, some are speculating that demand for allocated or physical gold could see more demand from banks as a store of value. While the dollar and yield developments remain the key drivers for gold, over time and especially when the UK, one of the world’s largest trading centers for gold, joins towards the end of the year, Basel III may end up having a net positive impact on the price action.
Silver (XAGUSD) - Just like gold, silver also managed to find support after correcting 61.8% of the March to May rally which at $25.67 also co-insides with the 200-day SMA. Additional weakness below could see it target the 76.4% retracement at $24.95. The upside is currently capped at $26.26 with a break above potentially seeing it target the 50-day SMA around $27. RSI is in bearish sentiment with no divergence meaning the short-term risk is to the downside.
2024: The wasted year
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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.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
