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 as soft US data fuels market optimism
Ole Hansen
Head of Commodity Strategy
Key points
- Gold and silver receiving a fresh boost after softer US CPI and retail sales brought relief
- Silver reached an 11-year closing high on Wednesday, just ahead of key resistance in the USD 30 area
- Focus on central banks and whether their political motivation to buy bullion lifts their willingness to pay record prices
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:
- 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 and property woes and the outside risk of the Yuan devaluing.
- 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.
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.
Recent commodity articles:
15 May 2024: Copper soars to record high, platinum breaks out
14 May 2024: COT: Crude long slump; grain purchases surge
8 May 2024: Fund selling exacerbates softening crude outlook
8 May 2024: Grains see bumpy start to 2024 crop year
6 May 2024: COT: Commodities correction spurs muted selling response
3 May 2024: Commodity weekly: Grains boost, correction in softs and energy
2 May 2024: Copper's momentum-fueled rally halts amid weakening fundamentals
29 April 2024: COT: Gold bulls stand firm despite recent correction
26 April 2024: Commodity weekly: Sticky inflation and adverse weather focus
23 April 2024: What drives the gold and silver correction ?
22 April 2024: COT: Declining momentum may signal shift toward consolidation
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
15 April 2024:COT: Hedge funds propel multiple commodities positions beyond one-year highs
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
8 April 2024:COT: Speculative interest in metals and energy gain momentum
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
2 Apr 2024:COT: Gold and crude longs maintained amid strong underlying support
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