Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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Time for the gold rally to pause?
Ole Hansen
Head of Commodity Strategy
Summary: Gold has rallied strongly in response to the US Fed pausing and even giving hints of reduced QT. Given the elevated expectations in the market, there is a short-term downside risk if the language on QT stop is not delivered.
Following a very strong December, and after pausing below $1,300/oz for a few weeks this month, the yellow metal broke higher last Friday when the market reacted enthusiastically to a Wall Street Journal article discussing the potential for a Fed turnaround on quantitative tightening.
On that basis the market may be most sensitive to any discussion of the Fed’s QT programme in Fed chair Jerome Powell’s press conference this evening. So be prepared for two peaks in the event risk reaction tonight – the issuance of the statement itself and any alterations it contains, and then how Powell responds to questions on the policy outlook in the press conference.
The market appears quite confident that it has tamed Powell’s prior hawkish tendencies after the market so viciously rebelled on the message delivered at the December Federal Open Market Committee meeting. So it looks like the market, especially gold, is positioned for a Fed thaw on QT even if it expects a two way message on rate guidance. In other words if looks as if the higher volatility scenario would be a more hawkish Fed than expected on the QT discussion.
Renewed risk appetite for stocks and riskier bonds has only somewhat offset the positive impact on gold of a weaker dollar and macroeconomic and geopolitical concerns. While we maintain a bullish outlook for gold as highlighted in our Q1 Outlook, we cannot ignore the risk of a short-term pull-back should the FOMC fail to deliver what the market expects.
One of the ways to seek downside protection while maintaining a bullish view on gold is through the use of options. Paying for protection ahead of a key risk event such as today’s FOMC meeting makes sense in our view. Below we have highlighted a couple of options example with the cost being the premium paid for the right –but not the obligation – to sell gold at a specific (strike) price.
Sport Gold (XAUUSD)
XAUUSD, Put strike $1,300/oz, Expiry February 6, Cost $2.5/oz, Reference price: $1,314/oz.
COMEX Gold
GCH9, Put strike $1,300/oz, Expiry February 25, Cost $5/oz, Reference price: $1,316/oz.
There are multiple different ways to gain exposure to gold. Below we have listed a selection for inspiration ranging from spot, futures and stocks to exchange-traded funds providing an exposure to gold or a basket of mining companies. These have been picked primarily due to their size and should not be regarded as specific recommendations.
Sport Gold (XAUUSD)
XAUUSD, Put strike $1,300/oz, Expiry February 6, Cost $2.5/oz, Reference price: $1,314/oz.
COMEX Gold
GCH9, Put strike $1,300/oz, Expiry February 25, Cost $5/oz, Reference price: $1,316/oz.
There are multiple different ways to gain exposure to gold. Below we have listed a selection for inspiration ranging from spot, futures and stocks to exchange-traded funds providing an exposure to gold or a basket of mining companies. These have been picked primarily due to their size and should not be regarded as specific recommendations.
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