Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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Gold and silver look to FOMC for direction
Ole Hansen
Head of Commodity Strategy
Summary: While gold has been drifting lower only to bounce after finding strong support ahead of $2000, silver has - almost as per usual - experienced a roller-coaster-month, at one point slumping to a two-month low before recovering strongly, supported by a China stimulus-led rally in industrial metals. Following a very strong Q4-2023, the small losses seen in both metals so far this month have mostly been driven by a stronger dollar, up around 2% against a broad basket of major currencies, and the market taking a raincheck on the timing, pace and depth of incoming rate cuts.
The precious metals sector has spent most of January consolidating following strong gains during Q4 last year when gold rose 11.4% and silver 7.2% as the US rate focus finally turned away from more hikes to cuts. The small losses seen in both metals so far this month have mostly been driven by a stronger dollar, up around 2% against a broad basket of major currencies, and the market taking a raincheck on the timing, pace and depth of incoming rate cuts. Note, the market is currently pricing in a 50% chance of a rate cut at the March 20 meeting while expectations for the entire year have moderated from six to five 25 basis point rate cuts.
While gold has been drifting lower only to bounce after finding strong support ahead of $2000, silver has - almost as per usual – experienced a roller-coaster-month, at one point slumping to a two-month low before recovering strongly, supported by a China stimulus-led rally in industrial metals. The result being a very volatile relationship between the two metals which at one point saw the gold-silver ratio surge to a September 2022 high above 92 ounces of silver to one ounce of gold, before dropping back to the current 88 ratio.
The fact gold has ‘only’ lost around 1% despite the stronger dollar and a pickup in bond yields and reduced rate cut expectations is likely to have been driven by geopolitical concerns related to tensions in the Middle East, the worst since at least the 1970’s according to US Secretary of State Blinken, and not least continued strong demand for physical gold from central banks and China’s middle class attempting to preserve their dwindling fortunes caused by the property market crisis and one of the world’s worst performing stock markets as well as a weakening yuan.
According to data from China’s General Administration of Customs, imports of gold for non-monetary use rose to 1447 tons last year, breaking the previous record of 1427 tons in 2018. Most Chinese individuals are unable to buy US dollars or US dollar-denominated products to hedge against yuan depreciation, meaning buying gold as the most accessible means to safeguard the value of their assets, a demand which at some point last September saw spot gold prices on the Shanghai Gold Exchange trade around 120 dollars per ounce above the London spot price. In addition, the People’s Bank of China (PBOC) was a very active buyer last year, accounting for close to one-quarter of all central bank purchases, after lifting their reserves by 225 tons to 2235 tons by year end (Source: World Gold Council).
Gold and silver are both likely to remain stuck until we get a better understanding about the timing, pace and depth of future US and EU rate cuts. Until the first cut is 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. With that in mind, the short-term direction of gold and silver will continue to be dictated by incoming economic data and their impact on the dollar, yields and not least rate cut expectations. With the U.S. growth outlook improving, the FOMC is in no hurry, and with that in mind, the current number of projected rate cuts cannot go any higher until the cat is out of the bag (cuts begin) or economic data suddenly takes a turn for the worse.
Investors in ETFs and hedge funds in the futures market have been net sellers so far this month with total holdings in ETFs down 47 tons this month and 283 tons in the last twelve months. Managed money traders such as hedge funds and CTA’s meanwhile held a 76.6k lots net long on January 23, following a three-week reduction of 61k lots (190 tons). The limited (negative) price impact of this selling highlights an underlying physical demand which is not visible in the so-called ‘paper’ market.
Silver, in a relatively steep downtrend this past month, tumbled below $22 last week, only to see a strong recovery which by now has taken it back above $23 ahead of Fibo resistance at $23.45. For now, the main directional input is likely to be supplied by movements in gold and copper which following last week’s China stimulus-led bounce has run out of steam with resistance at $3.90 in High Grade and $8600 on LME currently preventing more silver-supportive gains.
Spot gold, in a small downtrend this month, has managed to bounce after finding strong support ahead of $2000 with the break above trendline resistance, last at $2028, and confirmed by a break above $2040 raising the potential of further gains. The latest move higher being supported by lower Treasury yields after the US Treasury unexpectedly reduced its estimate for federal borrowing this current quarter. In addition, traders will also be focusing on Wednesday’s Federal Reserve meeting as it may provide fresh clues on when US monetary easing will start. Recent US data has been inconclusive, while the Fed’s preferred gauge of underlying inflation cooled to a near three-year low, consumer spending topped estimates.
Commodity articles:
26 Jan 2024: Commodity weekly: Back in black supported by China stimulus
25 Jan 2024: Grains up on short covering; softs supported by tight supply
24 Jan 2024: Disruption risks drive specs into Brent; distorted EIA report up next
23 Jan 2024: Silver and copper in focus after recent declines
19 Jan 2024: Commodity weekly: Middle East, US rates, Bitcoin ETFs & Freight rates
17 Jan 2024: Natural gas focus switch from cold to milder weather ahead
16 Jan 2024: Data dependent precious metals continue their bumpy ride
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
Previous "Commitment of Traders" articles
29 Jan 2024: COT: Squeeze risks after funds sold into rising commodity markets
22 Jan 2024: COT: Commodities short-selling on the rise amid China woes and Fed caution
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 under owned 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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