Gold and silver rallies extend further
Head of Commodity Strategy
Summary: Gold continues its impressive rally and yesterday it broke back above $1600/oz to reach the highest close since 2013. The recent move has been particular impressive occurring at time when the dollar has been breaking higher against several major currencies. In this update we take a look at why gold remains in demand despite the apparent headwinds.
Gold continues its impressive rally and yesterday it broke back above $1600/oz to reach the highest close since 2013. The recent move has been particular impressive occurring at time when the dollar has been breaking higher against several major currencies. The dollar strength has been particular noticeable against the euro which has dropped to a near 3-year low and in the process gold priced in euros has rallied to a fresh record high at €1490/oz.
The rally has also occurred despite reduced COVID19 fears with the market right or wrongly increasingly adopting a belief that it will primarily be a Q1 event. This on the assumption central banks and governments will do whatever it takes to support a return to trend growth later this year.
So why is gold in demand when other markets are doing better and the dollar is rising? We believe that the combination of additional rate cuts, increased stimulus, negative US real yields and U.S. stocks back to record levels will continue to drive strategic diversification and safe haven demand. Adding to this the potential risk that the virus outbreak may have a longer than expected impact.
January was a particular worrying months for the markets with U.S.-Iran tensions being followed by the virus outbreak. During January total holdings in Exchange-traded funds backed by bullion rose by an average of 1.3 tons/day. So far this February holdings have, despite the mentioned dollar strength and recovering markets, been rising by 1.9 tons/day.
Gold has extended its rally today and reached the January top at $1611/oz. With the metal moving higher, despite the mentioned headwinds from other markets, it is difficult to see what at this stage can halt or pause the rally. Silver which suffered a deeper correction than gold last year has benefited from the ongoing focus on precious metals. Over half of silver demand comes from industrial applications and this is the main reason why it has struggled amid worries about the virus impact on global growth.
However with a lighter position than gold the continued rally has once again helped attract interest from traders looking for relative value. After finding support at $17.50/oz it has spent the past five days outperforming gold with the gold-silver ratio dropping back towards 87 (ounces of silver to one ounce of gold).
Silver may find some resistance ahead of $18.60/oz (dotted line) while gold, for lack of clear technical levels, could be heading towards the next round number at $1650/oz. However having reached resistance at $1611/oz it may pause first in order to gauge the level of support at these higher levels. A small correction could see it test the recent high at $1590/oz.
While total ETF holdings continue to reach new record highs hedge funds have maintained a net-long between 200,000 and 300,000 lots since last October. The latest breakout is likely to attract fresh momentum buying which will be added to the 229,369 lots (22.9 million ounces) they held during the latest reporting week to February 11. The speculative long in silver is significantly lower than gold and at 56,011 lots there is still some room to go before reaching the 2017 record at 99,000 lots.
Latest Market Insights
Quarterly Outlook Q3 2022: The Runaway Train
- Central banks' attempts to kill inflation is a paradigm shift, which could end in a deep recession.
Tangible assets and profitable growth are the winnersWith US equities officially in a bear market, the big question is where and when is the bottom in the current drawdown?
Understanding the lack of investment appetite among oil majorsThe everything rally seen in recent quarters has become more uneven, as its strength is driven by commodities in short supply.
The pressure is on as the wind leaves the sailsWith cryptocurrencies in sharp decline, are we entering a crypto winter or is the bear market a healthy clean-up of the crypto space?
Why the Fed can never catch up and what turns the US dollar lower?Many other central banks are set to eventually outpace the Fed in hiking rates, taking their real interest rates to levels higher than the Fed will achieve.
Bank of Japan: Swimming against the tideThe Japanese economy has gone from the age of deflation to rapidly rising prices in no time, leaving the Bank of Japan in a pickle.
Green transformation detour and bear market hibernationWith the impending risk of global econonomic derailment, we share the five things investors need to consider in this new half year.
Crisis redux for the eurozone?Whether there's going to be a recession in Europe or not, the path towards a stable economy will be agonizing.