Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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What’s next as gold reaches USD 2,300?
Ole Hansen
Head of Commodity Strategy
Key points
- Gold remains a buy-on-dip market, defying the normal negative impact of dollar and yield strength
- Silver breaks higher, supported by gold and not least a strong rally in copper
- Consolidation may follow in the short-term before rate cuts potentially triggers a second leg higher
In our end of March update, we wrote about how gold's recent behaviour, where the yellow metal had been rising without clear reasons to explain the move, deserved a great deal of respect as it pointed to sustained strong underlying demand. Since then, the rally which started back in early October when Hamas attacks on Israel raised the geopolitical temperature, has gone from strength to strength, resulting in last month's 8.3% gain to a record high.
Today, gold reached the USD 2,300 target we set out in our Q1 24 outlook titled “Year of the metals”, where we expressed our bullish views on gold, silver, copper, and eventually also platinum. It is however interesting to note the target was achieved without three important drivers, namely rate cuts, where expectations have fallen from above seven at the start of the year to less than three currently. With rate cuts on the horizon, we envisaged a weaker dollar, and lower real yields would lead to a pickup in demand for ETFs from real money managers. Neither of these have yet materialised, and instead gold has been driven higher by hedge funds, or speculators enjoying the strong momentum that has been set in motion by strong demand from investors around the world responding to heightened geopolitical tensions and debt-financed growth.
In our Q2 24 outlook released earlier this week, we highlighted the reasons why we believe the year-long consolidation phase across the commodity sector is over, not least due to expectations for industrial and precious metals to perform well, together with energy and a heavily shorted grains sector.
In the short term, both gold and silver will likely consolidate, but with rate cuts leading to dollar and yield tailwinds still awaiting on the horizon, we see gold potentially make an extension towards USD 2,500 and silver towards USD 30, the February 2021 high. The biggest threats to prices being the unlikely lowering of the geopolitical temperature, central banks pausing their aggressive gold buying spree while adapting to higher prices, and hedge funds pairing back part of the near 300 tons of gold they accumulated through the futures market last month.
The strong momentum rally that followed last month's breakout above USD 2,075 has so far not been challenged, with a mid-March consolidation only triggering a 50-dollar correction. The lack of notable corrections, potentially challenging recently established longs held by hedge funds and CTAs, has been key to gold's continued rally. Using Fibonacci as a guide, a correction at this stage to USD 2,245 or even USD 2,225 may not be enough to challenge the mentioned long positions. Following a period of consolidation, the prospect for rate cuts and a resumption of central bank buying could potentially see the price reach for USD 2,500 later in the year, while the big line in the sand below remains USD 2,075
Silver, meanwhile, has for a while been struggling relative to gold, not least because the white metal has not enjoyed support from central bank buying. During the past month, however, the semi-precious metal which derives around half of its demand from industrial applications has received a boost from a recovering industrial metal sector, not least copper which has jumped to a 14-month high in response to tightening mined supply outlook and Chinese smelters discussing production curbs at a time where hopes for a global recovery in demand gather momentum.
During the past week, the gold-silver ratio has slumped from above 90 ounces of silver to one ounce of gold to the current 84.7, a move that highlights silver's ability to rally hard when it receives dual support from both gold and copper. From a technical perspective, the break above resistance-turned-support around USD 26 was relatively quickly followed by a break above USD 27, the March 2022 high, with the next major level to watch being the USD 28 area, our initial target for the year, ahead of the decade high at USD 30.
Commodity articles:
3 April 2024: Cocoa: A 50% farmgate price boost a step in the right direction
27 Mar 2024: Crude oil maintains support amidst array of bullish signals
26 Mch 2024: Gold's behaviour points to sustained demand
20 Mch 2024: Attacks on Russian refineries lift risk premium and crude prices
19 Mch 2024: How to add copper exposure to your portfolio
15 Mch 2024: Commodity weekly: Green shoots seen across key sectors
13 Mch 2024: Lack of catalyst pushes crude into tightening range
8 Mch 2024: Commodity weekly: Gold and silver steal the limelight
8 Mch 2024: Investing with options - Gold optionality
6 Mch 2024: How to add gold exposure to your portfolio
6 Mch 2024: Video: What happened to the gold prices?
1 Mch 2024: Grains dip, cocoa soars, gold and oil see rays of strength: February’s commodity mix
Previous "Commitment of Traders" articles
2 Apr 2024: COT: Gold and crude longs maintained amid strong underlying support
25 Mch 2024: COT: Hedge funds zoom in on crude, copper and silver
18 Mch 2024: COT: Hedge funds buying expands from precious metals to copper and grains
11 Mch 2024: COT: Specs rush back into gold, elevated yen short in focus
4 Mch 2024: COT: Underinvested speculators fuel gold's latest surge
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