Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
Head of Commodity Strategy
Summary: Gold dropped below $1900/oz on technical selling yesterday only to climb back above when the break was met with strong buying interest through exchange-traded funds. While maintaining a positive outlook, the latest price action has turned the short-term outlook more neutral with additional dollar strength and stock market weakness being the two key downside risks for the market
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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In our latest update titled “Gold too passive, risks deeper correction”, we observed how gold increasingly had seen its movement mirroring those seen in U.S. stocks. The lack of fresh input from bonds and the dollar - up until yesterday - meant that algorithmic trading systems, often trading correlations between markets, have moved to the driving seat, thereby creating an unusually positive correlation between gold and stocks.
We maintain a positive medium term outlook for gold but also accept that tactical trading strategies may pounce on the break below $1900/oz in order to force long liquidation and lower prices. Based on the latest price action, the short-term outlook has turned more neutral with the additional dollar strength and stock market weakness being the two key risks for the market.
Gold dropped below $1900/oz on technical selling only to climb back above when the break was met with strong buying interest through exchange-traded funds. Having broken below the 50-day moving average, the risk of an even longer and deeper correction can not be ruled out. Fibonacci levels to watch are $1872/oz followed by $1825/oz.
The combination of gold’s current correlation with stocks, losing further ground, and the dollar rallying the most in three months was the trigger that sent precious metals into a mini tailspin. The markets are currently reacting to dimming outlook for further U.S. fiscal stimulus, rising Covid-19 cases around the world, U.S.-China tensions and the very clear risk of increased volatility around the presidential election.
As mention, the dollars biggest advance in three months took the EURUSD uncomfortable close to the 1.1700-1.1735 pivot area. Speculators have increasingly in recent months been expressing their negative dollar view through buying of EURUSD. A break below could see the Greenback rally onto the comeback trail, thereby creating additional headwinds for commodities.
However, precious metals stood out yesterday with the sector taking a bigger hit than growth dependent sectors such as industrial metals and energy. It also once again highlighted the battle between short-term technical traders selling futures on the technical break below $1900/oz and long-term investors rushing in to snap up gold at lower prices. Total holding in exchange-traded funds backed by bullion jumped by almost 36 metric tons or 1.2 million ounces yesterday, the biggest one-day increase in more than four years.
Once again it was silver and platinum, a recent climber, which bore the brunt of the selling. The gold-silver ratio jumped to 79 after having traded in a relative tight range around 72 ounces of silver to one ounce of gold. Platinum meanwhile also suffered from its lack of liquidity and despite a recent improvement in the fundamental outlook it slumped with the gold-platinum ratio rising to 2.14 ounces of platinum to one ounce of gold after recently finding support at the important 2 level.
Having broken below $26/oz and its 50-day moving average, silver is once again looking for support. Using Fibonacci retracements from the June low, it has so far managed to find support ahead of $23.40, the August low with further weakness pointing to $21.9 as the next level.