Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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Resilient gold market defies lower rate cut predictions
Ole Hansen
Head of Commodity Strategy
Summary: Gold continues to grind higher with the current level around $2035 reducing the monthly loss to just 1%, an impressive performance during a month that has seen short-end yields shoot higher in response to a reduction in the expected number of US rate cuts from six to around three this year. Despite the rising 'cost' of holding a non interest paying gold position and the markets current obsission with AI related stocks and cryptos, the yellow metal has done well amid underlying demand for physical gold as well as the softer dollar. In this update we also take a look at the drivers currently dictation the direction of silver.
Gold continues to grind higher with the current level around $2035 reducing the monthly loss to just 1%, an impressive performance during a month that has seen US rate cut expectations deflate from six to near three with the first not fully priced in before July. These developments have seen US 10-year yields rise by more than 35 bps to 4.28% while the 2-year yield has jumped by 51 bps to 4.72%, thereby sharply raising the opportunity cost of holding a non-yielding position in gold.
The rising cost of carry together with the market's obsession with AI-related stocks, potentially driving a false sense of stability across markets, have seen paper demand for gold continue to crumble with total holdings in bullion-backed ETFs down 44 tons this month, and 95 tons so far this year. Against these headwinds, support has been led by a softer dollar and speculators covering short positions that was initiated at the start of the month when gold briefly broke below $2000.
The US CFTC in their latest Commitments of Traders report covering the week to February 20, showed speculators increased their net long position in COMEX gold futures by 18k contracts (1.8 million ounces or 51 tons) to 64k contracts, the vast majority of which was driven by a 17k contract reduction in the gross short from wrong-footed short sellers. This rinse and repeat action from speculators selling into weakness, and buying into strength has been the prevailing behavior since December during which time gold has been trading within a narrowing range.
Turning our attention to investors' positions in silver we find a similar pattern with total ETF holdings down 437 tons to 21,407 tons on the month so far, its worst monthly withdrawal since last July. Managed money accounts, meanwhile, remain much more receptive to short-term price developments, and just like gold they have been struggling recently, with the lack of momentum leading them to buy highs and sell lows. Weakness at the start of the month saw funds enter net short positions in COMEX silver futures, only to be forced to flip back to a net long in the week to February 20, when a gold and industrial metal bounce supported higher prices.
The fact gold has ‘only’ lost the mentioned percentage despite the strong 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, 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 a prolonged stock market sell off.
We keep a bullish outlook for gold and with that also 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. Not least the PCE Deflator, the Fed’s preferred inflation metric which is due on Thursday.
Spot gold, in a downtrend since Dec, has continued to recover after the recent failed attempt below $2000 helped trigger fresh buying from wrong-footed longs and momentum focused traders looking for a fresh attemp towards the upper channel, currently at $2048 followed by $2065, the February 1 high.
Spot silver, meanwhile, remains locked in a range as well with firm support around $22 while resistance around $23.50 looks equally solid. The current weakness that has seen the gold-silver ratio widen back to 90 ounces of silver per one ounce of gold from a mid-month low around 86, driven by fresh silver futures selling from funds who in the week to February 20 flipped their COMEX silver futures position from a near 10k contract short to a 5k contract net long.
Commodity articles:
22 Feb 2024: Copper short squeeze fades ahead of key resistance
21 Feb 2024: Gold's resilience despite recent futures and ETF selling
20 Feb 2024: WTI crude eyes resistance amid improved signals
16 Feb 2024: Commodity weekly: Grains tumble; Industrial metals eye China boost
15 Feb 2024: US rate cut delay drives gold below $2000
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
Previous "Commitment of Traders" articles
26 Feb 2024: COT: Record corn short, cocoa surge no longer supported by speculators
19 Feb 2024: COT: US inflation surprise drives broad selling of metals
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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