Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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Synchronized breakouts in gold and silver
Ole Hansen
Head of Commodity Strategy
Summary: The synchronized breakouts in both gold and silver have raised speculation about a further extension. Especially golds move above $1800 has, from a technical perspective, opened up for a move towards the 2011 record high. However the intense focus on the $1800 level in recent weeks may trigger some sooner-than-expected exhaustion with short term tactical positions already positioned for break. On that basis while we see further upside, today's price action could end up being critical for the short-term direction of both metals.
What is our trading focus?
XAUUSD - Spot gold
XAGUSD - Spot silver
XAUXAG - Gold-Silver ratio
GLD:arcx - SPDR Gold Shares ETF
GDX:arcx - VanEck Gold Miners ETF
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CNBC interview discussing the latest gold developments
Spot gold has broken above $1800/oz thereby succeeding what it failed to do on two previous occasions, most recently in 2012. With silver at the same time breaking resistance at $18.40/oz the path towards higher prices have now opened up. The break could now signal an extension for gold towards the 2011 record high at $1920/oz while silver could take aim at the next level of resistance just below $19/oz followed by $19.65/oz.
NOTE: The intense focus on $1800/oz in gold in recent weeks may risk triggering some exhaustion in the market. The anticipated break and overriding bullish market sentiment may have already attracted an army of short-term tactical long positions. If the break, measured on today's closing price, fails to attract fresh momentum buying we may see some profit taking emerge. Overall however we see no reason why additional gains can not be achieved over the coming weeks and months. But an interesting day lies ahead no doubt.
The single biggest input that has driven the latest move higher has been the recent developments in U.S. yields. While the yield on ten-year notes remain anchored in a relative tight range, we have seen breakeven yields, an expression of inflation, move higher leading to a drop in real yields to the current -0.8%. These developments basically highlight what a U.S. market with yield-curve control would look like into a rising inflation scenario.
This below chart remains our favorite when it comes to decipher what moves gold. It highlights the importance of keeping track of the U.S. economy through developments in yields, especially real yields which shows the expected return an investor will receive holding a U.S. ten-year bonds once inflation (breakeven) has been subtracted.
While EM physical demand remains very weak due to Covid-19 lockdowns and recession, the demand for “paper” gold has more than off-set those declines. Total holdings in bullion-backed ETF’s has reached 104 million ounces, up 25% so far this year. Hedge funds meanwhile have returned to the buy side after cutting their net-long in COMEX gold futures to a one-year low. During the past three weeks - up until June 30 - they increased their net-long by 5.4 million ounces (54k lots) to 18 million ounces, some 37% below the February peak.
The break above $1800/oz, the highs that got rejected in 2011 and 2012 would from a technical perspective support a move to the 2011 record high at $1920/oz.
Silver which reached a $50/oz record high in 2011 has been on a downward trend against gold since 2016. The weakness as seen through the XAUXAG ratio culminated in March when it hit a record 125 (silver ounces to one ounce of gold). Since then silver has managed to claw back most of those losses but the current level at 98 remains well above the three-year average around 80.
However, the combination of a rally in both gold and industrial metals should provide the support needed for the metal to reclaim some lost ground. For now the break above $18.40/oz could signal an initial move to $18.95/oz followed by the 2019 high at $19.65/oz.
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