Head of Commodity Strategy
Summary: Gold has suffered a significant but not yet serious setback following its recent unsustainable surge to a fresh record high above $2135. A move that was driven by short covering and fear of missing out (FOMO) buying, until it reached levels that was hard to align with current fundamentals, not least considering no official nod has yet been given to support the succession of rate cuts currently priced in by the market
Gold has suffered a significant but not yet serious setback following its recent unsustainable surge to a fresh record high above $2135. A move that was driven by short covering and fear of missing out (FOMO) buying, until it reached levels that was hard to align with current fundamentals, not least considering no official nod has yet been given to support the succession of rate cuts currently priced in by the market. The metal nevertheless stays on track to record its best year since 2020 when it jumped by a quarter when investors bought gold amid worries about a later realized post-Covid inflation surge.
In this update from last month, we highlighted the fact gold and not least silver had seen strong December returns during the past six years, and wondered whether we would see a repeat this year. Currently both metals trade down on the month, with gold showing a 2.4% loss while silver dropped by more than 9%, and it highlights the risk when markets run to far ahead of fundamentals, in the process attracting a great deal of speculative buying interest from hedge funds who are not ‘married’ to their positions and who will turn on a dime should the technical outlook change.
While the trigger has been stronger US economic data, most recently last Friday’s monthly job report, driving a reduction in expected 2024 rate cuts from five to four, the driver was the need from traders to cut loss making positions, thereby extending the downside back towards the 200-day moving average, currently at $1952. In less than two months, speculators such as hedge funds and CTAs had reversed a 15k contract (1.5 million ounces) short to a 144k contract long, the bulk of which had been bought above the current level.
We keep a bullish outlook for gold into 2024 in the firm belief that rates have peaked, and that Fed funds and real yields will start to trend lower. In addition, it is also worth mentioning that central bank demand potentially is heading for another record year, with more than 1000 tons being removed from the market for a second year running, thereby providing a soft floor under the gold market. Central bank buying of gold, has according to estimates from the World Gold Council added around 10% to the price this year, and is therefore one of the main reasons the yellow metal during the past year has managed to rally despite surging real yields, and why silver suffered more during periods of corrections as they do not enjoy that constant and underlying demand.
However, with a great deal of easing already priced into the market, both silver and gold will, as seen this past week, continue to see periods where convictions could be challenged. It is also worth noting the continued lack of demand from ETF investors, not least asset managers who remain on the sidelines, and actually sold into the latest rally, amid the wide gap between gold and still rising US real yields as well as the current high cost of carry which will only come down when the Federal Reserve starts cutting rates.
Instead, the recent rally, as mentioned, has been mostly driven by less sticky hedge funds and other momentum driven traders, who will make constant adjustments as the price changes. For now, the “Santa” rally is on hold with all eyes on today’s US CPI print and Wednesday’s FOMC meeting where central bankers will likely address the big gap between their own dot-plot expectations for two cuts next year and the markets belief it will be closer to four.
For the short-term technical outlook, please look at this update from Kim Cramer, our technical analyst.
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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.
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