Gold and silver consolidate with focus on US rates Gold and silver consolidate with focus on US rates Gold and silver consolidate with focus on US rates

Gold and silver consolidate with focus on US rates

Ole Hansen

Head of Commodity Strategy

Summary:  Gold reached a fresh cycle high last week at $2048/oz, coming within just 22 dollars of the 2022 record peak. Silver experiencing a 31% rally since early March, reached a one-year high above $26/oz before encountering profit taking. After such strong gains, both metals are in need of consolidating their gains, especially after relative strength indicators began flashing overbought in both metals. Overall, however, we maintain a price supportive outlook and in this update we highlight some of those supportive drivers


Today's Saxo Market Call podcast
Global Market Quick Take: Europe


 

Gold reached a fresh cycle high last week at $2048/oz, coming within just 22 dollars of the 2022 record peak. Silver experiencing a 31% rally since early March, reached a one-year high above $26/oz before encountering profit taking. After such strong gains, both metals are in need of consolidating their gains, especially after relative strength indicators began flashing overbought in both metals.

The current correction started on Friday after stronger than expected US economic data indicated further economic strength, potentially forcing the Federal Reserve to keep rates higher-for-longer. Short maturity SOFR futures, as well as Fed funds futures, are currently pricing in a 25 basis point rate hike next month, while the prospect for additional hikes has gained tracking. The June23-Dec23 SOFR spread has gone from pricing in 80 bps lower rates by year-end to 60 bps currently. Together with a renewed surge in US bond yields and the dollar finding a bid following last week's sell-off, this has established the trigger for a correction.

Despite this, Gold (XAUUSD) has managed to hold above its 21-day moving average, currently at $1989, with support below that being the 38.2% retracement of the banking-crisis-led runup in prices.

Source: Saxo

What are the other precious metal drivers telling us about the current health of the rally?

First of all looking 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 the main driver was last month banking crisis which triggered a major change in the markets 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. 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 emerging 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 before some profit taking in the week to April 11 reduced the net long by 7.4k lots to 137.6 lots, some 38k lots below last year's peak that was reached around the time gold hit a $2070 record high.

Gold's recent strength is also being supported by the current outperformance of silver (XAUXAG) and gold mining stocks (GDX:arcx) as shown in the inverted, hence rising ratios below, a development that historically signals a healthy underlying support.

While the short-term outlook points to consolidation and the risk of lower prices before renewed strength, we maintain 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 more sticky with market expectations for a drop back to 2.5% perhaps 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 investor participation adding support should the above mentioned drivers eventually provide the expected breakout.

Silver (XAGUSD) is holding above $25 ahead of $24.50, an area that provided several tops back in January and February. A deeper correction risk towards $23.72 will depend on the markets continued focus on the risk of higher rates and a slow pace of cuts thereafter.

Source: Saxo

Disclaimer

The Saxo Group entities each provide execution-only service, and access to analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Inspiration Disclaimer and (v) Notices applying to Trade Inspiration, Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular, no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/en-sg/legal/disclaimer/saxo-disclaimer)

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Markets or its affiliates.

Saxo Markets
88 Market Street
CapitaSpring #31-01
Singapore 048948

Contact Saxo

Select region

Singapore
Singapore

Saxo Capital Markets Pte Ltd ('Saxo Markets') is a company authorised and regulated by the Monetary Authority of Singapore (MAS) [Co. Reg. No.: 200601141M ] and is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms & Risk Warning to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products such as Margin FX products may result in your losses exceeding your initial deposits. Saxo Markets does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Markets does not take into account an individual’s needs, objectives or financial situation.

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-sg/about-us/awards.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website are not intended for residents of the United States, Malaysia and Japan. Please click here to view our full disclaimer.

This advertisement has not been reviewed by the Monetary Authority of Singapore.

Apple and the Apple logo are trademarks of Apple Inc, registered in the US and other countries and regions. App Store is a service mark of Apple Inc. Google Play and the Google Play logo are trademarks of Google LLC.