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 rally on rising US-Russia tensions
Ole Hansen
Head of Commodity Strategy
Key points in this update:
- Precious metals enjoyed a strong run-up ahead of the US elections but turned sharply lower after a simultaneous surge in the USD and yields forced prices through key technical support levels.
- A correction that has now ended as heightened US–Russia tensions drive fresh demand for safe havens such as precious metals, as well as the Japanese yen, Swiss francs, and short-duration government bonds.
- The US debt situation will likely continue to deteriorate as the Trump administration increases unfunded spending towards tax cuts, infrastructure, and defence.
- It is worth noting that a recent drop in speculative positions in the futures market has almost entirely been driven by long liquidation, not fresh short selling.
Gold and silver prices continue to recover, with gains in both supported until yesterday by a fading dollar rally and, now, by worsening US–Russia relations after President Biden approved Ukraine's use of long-range missiles against Russia. This culminated this morning when the Kremlin stated, “Any aggression against Russia by a non-nuclear state with participation of a nuclear state will be considered a joint attack.” Shortly after, one newswire reported that Ukraine had made its first ATACMS strike inside Russia, resulting in fresh demand for safe havens such as precious metals, as well as the yen, Swiss francs, and short-duration government bonds.
Precious metals, both gold and silver, enjoyed a strong run-up ahead of the US elections but turned sharply lower after a simultaneous surge in the USD and yields forced prices through key technical support levels. This overwhelmed a market where hedge funds had held an elevated long position for months, especially in gold. Overall, we see no reason to alter our bullish stance on investment metals. While the recent USD 253 correction in gold was the worst in more than a year, it has to be seen in the context of the strong rally leading up to it. With that in mind, we view the correction as a healthy response to weeks of election-focused buying, which in some cases had led to softening demand from physical buyers balking at the prospect of adding further fuel to the rally.
The US debt situation will likely continue to deteriorate as the Trump administration increases unfunded spending towards tax cuts, infrastructure, and defence. In addition to continued demand from central banks seeking to de-dollarise their reserves, tariffs will raise inflation concerns, which should offset a potential slowdown in the pace and depth of US rate cuts. The biggest short-term challenge, which has now been reduced, was the overhang of long positions from speculators in the futures market. However, with the outlook for diverging central bank policies supporting the USD, the prospect of an immediate return to fresh record highs seems unlikely unless the geopolitical situation deteriorates to the point it starts to negatively impact demand across other asset classes, leading to a strengthening of the aforementioned haven bids.
Recent developments in four charts:
- Gold’s correction has occurred during a period where the expected number of 25 basis point US rate cuts by next December, including the three already seen, has slumped from ten to around three. A dramatic downgrade, the impact of which has been relatively small, highlighting other reasons for maintaining a bullish outlook
- The managed money net long in COMEX gold futures has, following three weeks of net selling, been reduced by 40,000 contracts to a three-month low of 197,000 contracts. However, it is worth noting that during this period to 12 November, less than 1,000 contracts of the change was driven by fresh short selling. In other words, while the need to reduce longs amid lower prices forced long liquidation, the weakness did not attract any fresh short-selling appetite. Holdings in exchange-traded funds backed by bullion have also seen a reduction amid lower rate cut expectations, keeping the funding cost relatively elevated.
- The Bloomberg Dollar Index’s relentless surge to a two-year high was the main trigger behind the correction seen in both gold and silver, with the white metal suffering a relatively bigger setback amid weakness across industrial metals caused by tariff-related demand worries. The combination of key support levels holding and a softer dollar was enough to support a recovery, which has now been strengthened by the aforementioned geopolitical worries.
- Spiking bond yields were also seen as a reason for selling precious metals. However, it is worth noting that the weakness was caused by concerns about an even bigger fiscal deficit, leading to an even bigger debt burden in a Trump 2.0 era. The United States is facing a significant financial challenge due to the interest payments on its national debt, with the amount projected to reach about USD 1.16 trillion for the entire fiscal year, marking a 30% increase from the previous year. The combination of rising yields and rising debt will only exacerbate the situation, hence the prospect of gold potentially performing well despite rising yields.
Recent commodity articles:
18 Nov 2024: COT: Limited dollar demand despite strength; Acclerated metals selling
11 Nov 2024: COT: Speculators bought energy and grains, sold gold ahead of elections
8 Nov 2024: Commodity weekly: Mixed response to Trump 2.0
6 Nov 2024: Podcast: US election and the market reactions, including commodities
6 Nov 2024: Trump and Republican victories spark commodity decline
4 Nov 2024: COT: Speculators flock to dollars, exit commodities ahead of US election
1 Nov 2024: Commodity weekly: Some weakness seen ahead of critical week
31 Oct 2024: Crude prices seek stability ahead of key support and US elections
30 Oct 2024: Will the US election result spark a gold correction?
29 Oct 2024: Podcast: Electrification's surge impact on commodities and equities
28 Oct 2024: COT: Crude length cut; silver and platinum see strong demand
25 Oct 2024: Commodity weekly: Market jitters on the rise ahead of U.S. elections
23 Oct 2024: Crude prices stalled by two-sided market risks
22 Oct 2024: Gold and silver's remarkable run in four charts
22 Oct 2024: Podcast: The Trump trade enters the metal market
21 Oct 2024: COT: Dollar shorts squeezed; Shift in commodity exposure from energy to metals
18 Oct 2024: Commodity weekly: Gold's record-breaking run continues
17 Oct 2024: Copper prices decline amid doubts about China stimulus impact
16 Oct 2024: How high can gold and silver rally?
8 Oct 2024: Podcast: Navigating market shifts: Fed rate cuts, commodities and rising food prices
8 Oct 2024: Video: These commodities might be impacted by the US election
7 Oct 2024: Crude oil surge caps strong four-week rally for commodities
7 Oct 2024: COT: Broad buying momentum persists, led by Brent, copper and grains
2 Oct 2024: Q3 2024 Commodity Outlook: Gold and silver continue to shine bright
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