Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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Data dependent precious metals continue their bumpy ride
Ole Hansen
Head of Commodity Strategy
Summary: The precious metals sector trades down on the month with gold and silver both stuck in ranges while speculation continues about the timing, pace and depth of future US and EU rate cuts. With that in mind, the short-term direction of both metals will continue to be dictated by incoming data and their impact on the mentioned timing as well as the dollar and bond yields. Overall, we maintain the view the prospect for lower real yields and lower funding costs as central bank rate cuts later in the year will drive a revival in demand from interest rate-sensitive investors and help propel gold to a fresh record high
The precious metals sector trades down on the month with gold and silver both stuck in ranges while speculation continues about the timing, pace and depth of future US and EU rate cuts. Until the first cut is being delivered the market may at times run ahead of itself, in the process building up rate cut expectations to levels that leave prices vulnerable to a correction. Recently a stronger-than-expected US inflation print for December helped send gold lower, but not through key support in the $2010 area, only to rise following a weaker than expected PPI print.
Some components in the PPI report being used in the PCE compilation, the Fed’s preferred inflation measure due next week, showed weakness, potentially lowering the 3-month and 6-month annualized rates of PCE inflation below the Fed’s 2% target. Together with simmering geopolitical tensions the data supported a strong push higher on short covering and fresh technical buying, before the yellow metal once again got rejected around $2060. However, as long the price continues to find support near $2010, gold will likely remain range bound, while a break above $2060 could target the late December high at $2088.
From a trading perspective, the short-term direction of gold and silver will continue to be dictated by incoming economic data and their impact on the mentioned timing and pace of future rate cuts. A situation made clear on Monday when ECB’s Holzmann pushed back against the market’s current pricing of six quarter percent cuts by the European Central Bank this year, giving lingering inflation and geopolitical risks. However, by the time his comments were contradicted by Villeroy, another ECB member, who said that cuts are very likely in 2024 but the timing remains uncertain, the technical damage had already been done resulting in selling from recently established longs.
As per our monitor above, we continue to watch movements in the dollar, 10-year US real yields, short-term interest rates futures as well as trade flows in ETFs and futures. Today’s weakness has been driven by the dollar, which following eight weeks of selling from speculators in the futures market has been left exposed to short-covering, a process that gathered momentum today amid increased geopolitical tensions and traders once again dialing back on the prospect of a March FOMC rate cut while hanging onto expectations the Fed will deliver at least six quarter percent cuts this year.
One of gold’s biggest achilleas heals remain the lack of interest from investors through ETFs, where total holdings continue to drop, falling to a near four-year low, and until we see the funding cost of holding a gold position beginning to come down, the prospect of a price supportive pickup in demand seems limited. Speculators in the futures market, meanwhile, will continue to add volatility to the market as they buy in the strength, only to reduce their exposure as prices weaken.
Silver continues to trade near a ten-month low relative to gold on a combination of a weak start to the year for industrial metals amid global economic growth concerns and lack of strong stimulus initiatives in China. The upside is also being obstructed by a nearby wall of resistance in XAGUSD around $23.60 as it attracts profit taking from short-term focused swing traders, while support at $22.50 looks equally strong, leaving the white metal range bound for now. Speculators in the futures market meanwhile maintain an overall weak belief in higher prices with the latest COT report covering the week to January 9 showing a 50% drop in the net long to just 8k contracts, a two-month low, and below the 12k average position held this past year.
Last week, Saxo’s strategy team released their Q1 2024 outlook titled “What happened to the future?”. In the commodities section, we outlined the reasons why we believe 2024 could become the “Year of the metals” with focus on gold, silver, platinum and copper. In precious metals, we believe the prospect for lower real yields and lower funding costs as central bank rate cuts will drive a revival in demand from interest rate-sensitive investors. Adding to these developments a fragmented world supporting continued demand from central banks and haven demand from others, the potential for a fresh record remains on the cards.
Commodity articles:
12 Jan 2024: Commodity weekly: geopolitical risks lift crude and gold prices
9 Jan 2024: Q1 Outlook – Year of the metals
5 Jan 2024: Commodity weekly: Bumpy start to 2024
4 Jan 2024: What to watch in crude oil as 2024 gets underway
4 Jan 2024: Podcast: Crude oil and gold in focus as a new year begins
21 Dec 2023: Weather, rates and unrest paint muddy picture for commodities in 2023
19 Dec 2023: Crude and gas pop on Red Sea Disruption Risks
14 Dec 2023: Fed's dovish tilt adds fresh fuel to precious metals
13 Dec 2023: Video - Why gold may enjoy a Santa rally for the 7th year in a row
12 Dec 2023: Video - Investing in Uranium
1 Dec 2023: Commodity weekly: Tight supply risks boost copper; OPEC+ struggles to control crude
30 Nov 2023: Precious metals take top spot for a second month
23 Nov 2023: A nervous crude oil market awaits OPEC's next move
23 Nov 2023: Podcast: Will Santa deliver another golden gift
22 Nov 2023: Will gold and silver see another Santa rally?
17 Nov 2023: Commodity weekly: Crude overshoots; silver the comeback kid
16 Nov 2023: Podcast: Silver comeback, watch OPEC as crude oil slides lower
16 Nov 2023: Crude oil weakness adds focus to upcoming OPEC meeting
15 Nov 2023: Soft CPI lifts gold and beaten down silver and platinum
12 Nov 2023: Copper supported by green transformation demand and peak rate speculation
10 Nov 2023: Commodity weekly: Crude oil risks overshooting the downside
Previous "Commitment of Traders" articles
15 Jan 2024: COT: Grains sector slump continues; Mideast risks lift crude demand
8 Jan 2024: COT: Weakest commodities conviction since 2015
18 Dec 2023:COT: Crude long hits 12-year low ahead of FOMC bounce
11 Dec 2023: COT: An underowned commodity sector raising risk of an upside surprise in 2024
4 Dec 2023: COT: Speculators add further fuel to gold rally
20 Nov 2023: COT: Crude selling slows, grains in demand
14 Nov 2023: COT: Crude long slumps; agriculture sector in demand
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