Head of Commodity Strategy
Summary: The Bloomberg Commodity Index, which tracks the performance of 22 major commodities spread across the three major sectors of energy, metals and agriculture, rose by the most since January during the past trading week.
A decisive shift by the US Federal Reserve back to stimulus mode helped drive stocks higher and bond yields lower. The yield on US 10-year Notes briefly moved below 2% a 31-month low, while in Europe the German Bund yield hit an all-time low at minus 0.3% as the European Central contemplated additional stimulus measures. The dollar meanwhile touched a 3-month low against a basket of currencies on signs that US President Trump may be gearing up for a currency war.
These developments were all friendly to gold which shot higher trough multiple layers of resistance before pausing after breaking above $1,400/oz for the first time since 2013. Gold’s biggest challenge in the short term is its ability to confirm to recent buyers that a near six-year high in the price can now turn into being the new low.
We expect these latest developments have at least for now created a floor under oil. Not least considering our belief that the Opec+ group nations at their meeting on July 2 will reaffirm their commitments to keeping oil production capped for the remainder of the year. Adding to this is the improved risk appetite from the expected cut in US interest rates and a weaker dollar.
Brent crude oil reached its first major level of resistance on Friday as the geopolitical risk premium continued to build and short positions were scaled back. The double bottom now established at $59.50/barrel points towards further short-term gains.
The additional demand that led to the breakout was driven by the Federal Open Market Committee confirming it has moved to an easing stance, with the market pricing in a 100% probability of a cut at the July 31 policy meeting. The weaker dollar that followed this development, together with the heightened US-Iran tensions, also played their part in supporting the yellow metal.
However, above all, but still related to the changed outlook for central bank rates has been the slump in bond yields. The US-led slump in bond yields has over in Europe moved an even bigger amount of outstanding bonds into negative yield territory. This past week the amount of global negative-yielding debt jumped to a fresh record of 13 trillion dollars. Why is this important? It is because it removes the opportunity cost of holding a non-coupon or dividend paying asset such as gold.
From a technical perspective resistance is now at $1,433/oz followed by $1,483/oz, which represents a 50% retracement of the 2011 to 2015 sell-off. Support needs to be found at the previous highs at $1,375/oz and $1,366/oz as highlighted in the chart below.
While gold has raced higher silver has yet to break to break the downtrend from 2016 let alone challenge the 2019 high above $16/oz.