Quarterly Outlook
Macro Outlook: The US rate cut cycle has begun
Peter Garnry
Chief Investment Strategist
Head of Commodity Strategy
Gold and silver received a fresh boost on Wednesday as a softer US April CPI brought relief after three consecutive months of upside surprises that helped reduce US interest rate cut expectations. Furthermore, the US economy is showing signs of a slowdown, with weaker data including lower GDP growth, contractionary PMIs, and subdued consumer confidence leading to softer retail sales, all supporting a relatively dovish stance from the Federal Reserve.
While gold trades near a one-month high, the main action was seen in silver reaching an 11 year closing high on Wednesday, and platinum which has broken higher after a year of sideways action. Both being supported by surging industrial metals, not least copper which has been squeezed higher after hedge funds and physical traders got caught holding short positions in the COMEX futures market. The combination of sticky inflation, note the so-called super core metric remains stuck near 5% while the 6-month annualised core CPI is at 4%, and economic data softness will likely continue to support precious metals demand.
Once the rate cut cycle eventually begins later this year, gold will likely see renewed demand from ETF investors, many of whom, have been net sellers since 2022 when the interest rate cycle started, a process that helped lift the cost of holding non-interest paying gold relatively to US T-bills which currently offers a 12-month return above 5%.
We maintain our positive outlook for investment metals with the below drivers still the focus:
Gold has throughout the latest and once again shallow consolidation phase managed to hold above technical levels which otherwise could have triggered long liquidation from managed money accounts, currently holding an elevated speculative long in the futures market.
While the buy-on-dip interest will support the gold market, the question is whether the current momentum is strong enough to force prices higher to a fresh record. We believe some patience is called for, not least considering the investors may need more time to adjust and adapt to current high price levels. This includes central banks, major buyers since 2022 and whether their political motivation to buy bullion lifts their willingness to pay record prices. In addition, it is also worth keeping an eye on silver which potential could create fresh tailwind on a break above the USD 30 area.
Silver has, just like gold, gone through a month-long period of consolidation before a surging industrial metal sector supported the latest bounce back towards an absolute key area of resistance between USD 29.85 and USD 30.00. Having already recorded the highest close in 11 years, a break could potentially set in motion an additional reaction from momentum following funds, currently holding a relatively small net long futures position. The gold-silver ratio, which measures the relative strength between the two metals, trades below 81 ounces of silver to one ounce of gold, down from a January peak above 92, yet still above support at 78.50 and not least 76.
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