Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
US rate cut delay drives gold below $2000
Ole Hansen
Head of Commodity Strategy
Summary: Gold prices have stabilized after falling below a key support level with higher than expected US inflation once again delaying the timing of the first US rate cut. The short-term direction of gold will be determined by economic data and its impact on the dollar, yields, and rate cut expectations. Central banks and retail investors, particularly in China, continue to provide support for gold prices despite the recent decline, and while physical demand is likely to remain strong, outflows from exchange-traded funds will continue to limit the upside until the rate cut cycle begins. Silver meanwhile continues to find strong support in the $22 area.
Gold has stabilized following Tuesday’s slump below support-turned-resistance at $2005 after US inflation surprised to the upside, thereby raising further doubts about the timing, pace and dept of future US rate cuts. A potential delay in the timing of the first rate cut, now pushed back to the June 12 FOMC meeting, saw US bond yields spike higher with the 10-year rising to 4.33%, a 51-basis point jump in just two weeks. Meanwhile, the yield jump saw the Bloomberg dollar index reach a three-month high, supported by the prospect for other central banks like BOE, ECB and SNB acting sooner thereby lifting the greenback's relative attractiveness.
We keep a bullish outlook for gold and silver, but as we have highlighted on several occasions in recent months, both metals are likely to remain stuck until we get a better understanding about the delivery of future US 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.
As mentioned, the short-term rates market has gone from pricing in more than six 25 basis points US rate cuts this year to less than four, while bets on the timing of the first cut has moved out to June, potentially leaving a very narrow window available for rate cuts. This based on the assumption the FOMC are unlikely to cut rates near the November US Presidential election in order to avoid being accused of showing favoritism towards the incumbent president.
Having broken below key support, the market is currently engaged in a battle between selling from short-term momentum strategies and continued physical demand – supporting a soft floor - from central banks and retail investors, primarily in the Middle East, India and not least 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 the weakening yuan. Ahead of the Chinese New Year holiday this week, the World Gold Council reported wholesale gold demand in China had seen its strongest January ever with 271 tons bought while the PBoC reported the 15th consecutive gold purchase in January, adding 10 tons to their gold reserves lifting the total to 2,245 tons.
In their 2023 review, the World Gold Council described another year of blistering demand, led by central bank buying and jewelry consumption. Central bank buying reached 1,037 tons, just 45 tons short of the 2022 record, while jewelry consumption despite the high price environment held steady at 2,093 tons. Numbers like this help explain why constant outflows from exchange-traded funds since May 2022 have had such a limited negative price impact. During this time asset managers and other investors have looked elsewhere amid the rising funding and opportunity cost compared to holding a position in bonds, and this situation is unlikely to change until US rates are being cut, hence the need for patience.
Spot gold (XAUUSD)
According to Kim Cramer, our technical analyst, the short-term technical outlook has deteriorated following the break below $2005 and it would require a close above that level to return to neutral while a break above $2065, the recent high is needed for the market to turn bullish again. However, given the potential for non-visible physical demand, especially once China returns to work next week, the downside risk may end up being relatively limited, with the market instead prolonging its current wait-and-see stance.
Spot silver (XAGUSD)
The white metal meanwhile continues to find support in the key $22 area with the latest attempt once again triggering demand from short sellers inclined to book profit rather than trying to force the price lower. Ahead of the high CPI-driven weakness speculators, such as hedge funds and CTA’s, held the biggest net short since August at 4784 contracts, and with $21.90 support holding once again some short covering has emerged to take it higher to relative safety and back to short-term. However, to change the outlook back to bullish, a close above the January high at $23.35 will be needed.
Commodities articles:
13 Feb 2024: Video: What is driving Cocoa's sweet price
9 Feb 2024: Commodity weekly: Refined product strength lifts crude
9 Feb 2024: Podcast: Year of the metals
7 Feb 2024: Crude oil supported by tightening fuel outlook
6 Feb 2024: Gold and silver turn defensive on reduced Fed rate-cut optimism
2 Feb 2024: Commodity weekly: Tight supply adds fuel to uranium and cocoa rally
1 Feb 2024: Commodities: January performance and ETF flows
30 Jan 2024: Gold and silver look to FOMC for direction
29 Jan 2024: Video: Unpacking the reasons behind soaring coffee prices
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
Previous "Commitment of Traders" articles
5 Feb 2024: COT: Speculators chase false crude break; grain short extends further
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
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