Gold trades steady despite fresh dollar and yield strength
Gold managed a small bounce but overall, it continued its recent struggle amid headwinds from a stronger dollar and rising bond yields. Not least ahead of Friday’s Jackson Hole speech from Fed chair Powell with gold traders worried that a hawkish statement would provide additional strength to the dollar and yields, thereby further delaying gold's return to strength by potentially sending it below support at $1729.
In a year where inflation has been surging higher, some investors may feel hard done by gold’s negative year-to-date performance in dollars but taking into account it had to deal with the biggest jump in real yields in more than 25 years and the dollar rising 10% against a broad basket of major currencies, its performance, especially for non-dollar investors remains acceptable.
We maintain the view that the market is overly optimistic with the assumption that central banks can successfully bring inflation down to the levels currently being projected. Such a scenario would create a challenging outlook for interest rate and growth sensitive stocks, thereby raising the need for tangible assets such as gold and commodities in general to weather a period of low growth and high inflation.
Natural gas, now the biggest component in the Bloomberg Commodity indexThe BCOM index together with the S&P GSCI and DBIQ Optimum Yield Diversified Commodity Index belongs to the heavy weights within the global investment industry for commodities. It tracks the performance of 23 major commodity futures targeting a one-third exposure in the main sectors of energy, metals and agriculture. The target weights are set once a year every January and if prices shift significantly during the year, a reweighting will not occur until the following January.
However, an astonishing 160% year-to-date surge in US natural gas futures has more than doubled its weight to 17.2% from 8%, and made it the biggest component in the BCOM index for the first time ever – more than double that of WTI and Brent combined. From a sector perspective, it has helped lift the total energy exposure by 9.2% to 40.9%. All other sectors and sub-sectors have seen reductions with the biggest impacting industrial and precious metals by a combined reduction of 7.5%. These moves away from target weights will not be adjusted until next January. At which point, we may see some major activity as the rebalancing process would see selling of gainers, especially natural gas while the biggest losers will be bought.