Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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Gold demand firm despite dollar headwinds
Ole Hansen
Head of Commodity Strategy
Summary: Gold investors resolve is once again being tested after the yellow metal posted its biggest one-day drop in three weeks yesterday. The sum of the latest news however remains in our opinion on balance positive for the prospect for gold eventually breaking higher.
Gold investors resolve is once again being tested after the yellow metal posted its biggest one-day drop in three weeks yesterday. The sum of the latest news however remains in our opinion on balance positive for the prospect for gold eventually breaking higher. The four major parts currently impacting the gold engine are the dollar, bond yields, equities and geo-political developments.
Investor participation remains high and during the rally on Tuesday to $1535/oz total holdings in bullion-backed Exchange-traded funds jumped by 22.2 tons. It is currently less than 60 tons below the 2012 record of 2,572 tons. Also, on Tuesday the number of total outstanding futures contracts on the gold contract traded in New York, the so-called Open Interest, reached a record 659,000 lots.
While expressing a firm belief in gold these developments also raise concerns about a correction should the market fail to hold onto support, currently located between $1500/oz and $1484/oz (chart below).
Returning to Tuesday it was the possibility of Trump’s impeachment and more importantly a weaker than expected consumer confidence number that helped send gold through resistance and on route to a potential rendezvous with the September high. Once again however, the market wanted it differently and the combination of a stronger dollar and Trump once again talking up the prospect for deal with China helped send gold straight back down to $1500/oz from where it is once again looking for support.
The biggest short-term challenge to gold and other commodities for that matter remains a stronger dollar. This after the EURUSD, the biggest and most traded currency pair, closed at a new low for this cycle at €1.0943 yesterday. So far today it is still holding above the double bottom created earlier this month at €1.0925.
We maintain a bullish outlook for gold with the combination of a prolonged period of low real yields and slowing growth prospects, made worse among EM countries by the strengthening dollar. Adding to this multiple geopolitical risk and a U.S. – China trade deal which remains far from being complete.
The very short-term outlook may however turn somewhat challenging given the mentioned dollar strength. Gold's strong rally earlier this quarter occurred despite a stronger dollar. With the dollar index closing yesterday at the highest level since early 2017 this time may be different, not least given the current lack of support from (rising) bonds and a U.S. stock market trading relatively stable. We view the dollar strength - which is the main theme in our Q4 Outlook out on October 3 - as temporary. However given the size of recent established longs we may witness a period of nervous trading in gold, silver and platinum.
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