Soft CPI lifts gold and beaten down silver and platinum

We have for some time been arguing the Fed is done hiking rates, but we also acknowledge that central bankers cannot express this view in public as they would risk boosting risk sentiment to the point it loosens financial conditions too soon. A predicament that was on clear display last week when Federal Reserve chair Jerome Powell was forced to dial back the dovish reprising seen following the November 1 FOMC (Federal Open Market Committee) meeting, when Powell strongly hinted that the Fed is done hiking rates.

However, with the FOMC focusing on inflation, rather than the current economic strength yesterday’s CPI print helped reignite the animal spirit among traders, the result being sharply higher equity markets, especially those beaten down sectors that have struggled recently amid elevated levels of debt and an increasing cost of servicing that debt. Examples of themes benefiting were biotech, bubble stocks, and energy storage and renewable energy, the latter two being themes that support demand for metals such as silver and platinum. See the latest update from Peter Garnry, Saxo’s head of equity strategy, titled “Green stocks rally on lower inflation; earnings update”

Gold:

After rallying by close to 200 dollars last month, gold went through a much-needed period of consolidation, during which time it did not respond (positively) to fresh yield and dollar softness following the mentioned FOMC meeting on November 1 when Powell hinted the Fed was done. With US ten-year bond yields more than 50bps below 5%, now key resistance, the risk to US fiscal policy, and especially whether the recent jump in both real and nominal yields would end up ‘breaking something’, has faded a bit, thereby reducing some of the support which helped propel gold sharply higher last month. Instead, the bullion market should now reestablish its negative correlation to yields and the dollar, however, following last month strong rally it could be argued that that additional dollar and yield weakness will be needed to send prices back above $2000 towards a fresh record high.

Apart from central bank buying, which continues at a record pace, leverage fund accounts, such as hedge funds and CTA’s as well as investor demand for ETFs remain key to underpin a continued rally in gold. We believe the prospect for peak rates, once confirmed, leading to an eventual lowering of the cost of holding non-interest paying precious metal positions, will be the trigger for the next move higher. Until then we keep our patiently bullish view on gold and see setbacks as a buying opportunity. 

After last month’s aggressive 200-dollar rally, supported by near record buying from hedge funds and CTA’s, gold reversed lower on profit taking before bouncing after finding support at the 200-day moving average level around $1935. With positive momentum returning as seen through the break above the 21-day moving average, spot gold will likely look at the recent consolidation low around $1980, while a break above would open for a revisit to and above $2000.