Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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What drives the gold and silver correction?
Ole Hansen
Head of Commodity Strategy
Key Points
- Gold and silver suffer relatively aggressive, but healthy corrections
- The key level to watch in gold is the USD 2,255-60 area and USD 26 in silver
- The depth of the correction will depend on hedge funds selling, having amassed a major long during the run up
Gold’s aggressive rally since the mid-February low is currently being challenged with bullion suffering a long overdue and relatively aggressive, but healthy correction, which will help determine the real level of underlying demand besides momentum and managed money accounts who normally trade with a short-term focus and will reduce longs should the technical and/or fundamental picture change.
Having rallied by almost USD 450 from the mid-February low, the correction currently unfolding risks being relatively brutal and will likely challenge traders' belief that further gains are possible. From a technical standpoint, the key area of support using Fibonacci retracement levels can be found in the USD 2,255-60 area where we find the 61.8% of the March to April extension and the 38.2% of the whole move from the mid-February low. Holding above this level will send a signal to the market that the retracement is nothing but a weak correction within a strong uptrend.
In our latest “Commodities weekly” we highlighted gold’s exceptionalism, having been able to rally despite strengthening headwinds from dollar and yield strength, as well as sharply reduced rate cut expectations this year. While the trigger for the correction is likely to have been driven by a reduced risk of a war between Israel and Iran, the driver was the two failed attempts to gain a foothold above USD 2,400 which signalled a short-term top in the market.
The depth of the correction now unfolding will depend on whether levels are broken that force hedge funds to reduce parts of the 17.9 million ounce (557 tons) net long position they amassed below USD 2,200 during a four-week period to March 12. While the current price is well above those entry levels, it is also safe to assume that these positions will be defended at significantly higher levels, hence the reason why we saw the biggest one-day slump in almost two years.
We maintain our positive outlook for investment metals with the below drivers still the focus once the correction dust settles:
- Geopolitical risks related to Russia/Ukraine and the Middle East still playing a supporting role
- Strong retail demand in China amid the desire to park money in a sector seen as relatively immune to a struggling economy amid deepening property woes and the risk of the Yuan devaluation.
- Continued central bank demand amid geopolitical uncertainty and de-dollarisation, and not least gold’s ability to offer a level of security and stability that other assets may not provide.
- Rising debt-to-GDP ratios among major economies, not least in the US, raising some concerns about the quality of debt. In other words, rising Treasury yields are not necessarily negative for gold as they raise the focus on overall debt levels and the sustainability of those.
- In addition, the focus is changing from the negative impact of lower rate cut expectations towards support from a reaccelerating inflation outlook.
Where gold goes, silver goes but faster
Just like gold, silver is also going through a relatively aggressive correction, with the selling being amplified by its recent failure to break above USD 30 per ounce, the 2020 and 2021 high. Having outperformed gold during the recent run-up, it is now retracing faster as seen through the gold-silver ratio which trades back up to 86 ounces of silver to one ounce of gold after hitting a low of 81.3 last month.
From a technical standpoint, the line in the sand in terms of support can be found just above USD 26, the 2023 high and 50% retracement of the 33% rally from the late February low at USD 22.70 to the April 12 high just below USD 30.
Commodity articles:
19 April 2024: Commodity weekly focus on copper, gold, crude and diesel
17 April 2024: Copper rally extends to near two year high
16 April 2024: Crude oil's risk premium ebbs and flows
12 April 2024: Gold and silver surge at odds with other market developments
10 April 2024: Record breaking gold highlights silver and platinum's potential
5 April 2024: Commodity market sees broad gains, enjoying best week in nine months
4 April 2024: What's next as gold reaches USD 2,300
3 April 2024: Q2 Outlook: Is the correction over?
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
22 April 2024: COT: Declining momentum may signal shift toward consolidation
15 April 2024: COT: Hedge funds propel multiple commodities positions beyond one-year highs
8 April 2024: COT: Speculative interest in metals and energy gain momentum
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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