Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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Gold’s resilience despite recent ETF and futures selling
Ole Hansen
Head of Commodity Strategy
Summary: Gold trades higher for a fifth day with the bid being supported by speculators covering short positions and buying back longs that was exited during last week's failed attempt to trigger a technical-driven sell-off below $2000. In addition, an underlying bid from central banks and retail buyers of physical gold continues to play its part in disrupting last week’s attempt to drive prices lower as Treasury yields rose and the traders moderated their US rate cut expectations.
Gold trades higher for a fifth day with the bid being supported by speculators covering short positions and buying back longs that was exited during last week's failed attempt to trigger a technical-driven sell-off below $2000. In addition, an underlying bid from central banks and retail buyers of physical gold continues to play its part in disrupting last week’s attempt to drive prices lower as Treasury yields rose and the traders moderated their US rate cut expectations.
The precious metal market, led by gold, started the year on a high note following a strong Q4-23 when the Fed focus finally turned from rate hikes to cuts. However, since then resilient economic data have driven down expectations for future rate cuts while delaying the timing of the first until mid-year. However, despite these headwinds, spot gold around $2030 only trades down 1.7% on the year, a muted response to a +2.5% stronger dollar, a 40 bps rise in US 10-year Treasury yields and expectations for 2024 rate cuts almost reduced by 75 basis points.
Investors in so-called ‘paper’ gold: being exchange-traded funds and money managers in futures have as expected responded to these challenges. Since late December total ETF holdings saw a 2.6-million-ounce reduction to 82.9 million, a four-year low while money managers such as hedge funds and CTA’s, often responding to short-term technical developments, cut their futures net long by 8.9 million ounces or 6.6% to 4.64 million (46,400 futures contracts), a four-month low. In the latest reporting week, when $2000 was being challenged funds sold 36,000 futures contracts at a volume weighted average price (VWAP) of $2036, a level that has now been exceeded, thereby leaving the bulk of these sold positions underwater.
The fact gold has ‘only’ lost the mentioned percentage despite the stronger dollar, a pickup in bond yields and reduced rate cut expectations is likely to have been driven by geopolitical concerns related to tensions in the Middle East, and not least continued strong demand for physical gold from central banks and China’s middle class attempting to preserve their dwindling fortunes caused by the property market crisis and a prolonged stock market sell off. Ahead of the Chinese New Year holiday last week, the World Gold Council reported wholesale gold demand in China had seen its strongest January ever with 271 tons (9.6 million ounces) bought while the PBoC reported the 15th consecutive gold purchase in January, adding 10 tons to their gold reserves lifting the total to 2,245 tons.
This data being backed by Swiss customs data which showed Swiss gold exports surged in January to their highest level since December 2016. Switzerland is the world’s biggest bullion refining and transit hub, and the 49% increase last month from a year ago was driven by robust sales to China and Hong Kong.
Silver, which is not enjoying the same amount of interest from physical buyers, especially non-existent demand from central banks, has nevertheless managed to keep up with gold’s recent bounce as seen through the gold-silver ratio’s drop to around 88 ounces of silver to one ounce of gold after hitting a near 92 high last month. Silver has just like gold been on the receiving end of speculator selling, which in the week to February left hedge funds holding a 9.6k lots net-short, the biggest belief in lower prices since last March.
Short covering since last Tuesday has been further strengthened by copper’s rally to a three-month high after Chinese banks cut their mortgage reference rate by the most on record in support for the troubled property sector. A move that has raised expectations for more aggressive measures to support the economy and consumer confidence in the months ahead.
We keep a bullish outlook for gold and silver, but as we have highlighted on several occasions in recent months, both metals are likely to remain stuck until we get a better understanding about the delivery of future US rate cuts. Until the first cut is delivered, the market may at times run ahead of itself, in the process building up rate cut expectations to levels that leave prices vulnerable to a correction. With that in mind, the short-term direction of gold and silver will continue to be dictated by incoming economic data and their impact on the dollar, yields and not least rate cut expectations.
Spot gold, in a downtrend since Dec, trades up for fifth day supported by continued physical demand and short-covering following last weeks failed attempt below $2000 per ounce. While support for now looks solid below $2000, resistance can be found at $2032, the 50-day moving average, $2052, the upper channel and $2065, the February 1 high.
Commodities articles:
20 Feb 2024: WTI crude eyes resistance amid improved signals
16 Feb 2024: Commodity weekly: Grains tumble; Industrial metals eye China boost
15 Feb 2024: US rate cut delay drives gold below $2000
13 Feb 2024: Video: What is driving Cocoa's sweet price
9 Feb 2024: Commodity weekly: Refined product strength lifts crude
9 Feb 2024: Podcast: Year of the metals
7 Feb 2024: Crude oil supported by tightening fuel outlook
6 Feb 2024: Gold and silver turn defensive on reduced Fed rate-cut optimism
2 Feb 2024: Commodity weekly: Tight supply adds fuel to uranium and cocoa rally
1 Feb 2024: Commodities: January performance and ETF flows
30 Jan 2024: Gold and silver look to FOMC for direction
29 Jan 2024: Video: Unpacking the reasons behind soaring coffee prices
26 Jan 2024: Commodity weekly: Back in black supported by China stimulus
25 Jan 2024: Grains up on short covering; softs supported by tight supply
24 Jan 2024: Disruption risks drive specs into Brent; distorted EIA report up next
23 Jan 2024: Silver and copper in focus after recent declines
19 Jan 2024: Commodity weekly: Middle East, US rates, Bitcoin ETFs & Freight rates
17 Jan 2024: Natural gas focus switch from cold to milder weather ahead
16 Jan 2024: Data dependent precious metals continue their bumpy ride
12 Jan 2024: Commodity Weekly: Geopolitical risks lift crude and gold prices
9 Jan 2024: Q1 Outlook – Year of the metals
5 Jan 2024: Commodity weekly: Bumpy start to 2024
4 Jan 2024: What to watch in crude oil as 2024 gets underway
4 Jan 2024: Podcast: Crude oil and gold in focus as a new year begins
Previous "Commitment of Traders" articles
19 Feb 2024: COT: US inflation surprise drives broad selling of metals
5 Feb 2024: COT: Speculators chase false crude break; grain short extends further
29 Jan 2024: COT: Squeeze risks after funds sold into rising commodity markets
22 Jan 2024: COT: Commodities short-selling on the rise amid China woes and Fed caution
15 Jan 2024: COT: Grains sector slump continues; Mideast risks lift crude demand
8 Jan 2024: COT: Weakest commodities conviction since 2015
18 Dec 2023:COT: Crude long hits 12-year low ahead of FOMC bounce
11 Dec 2023: COT: An under owned commodity sector raising risk of an upside surprise in 2024
4 Dec 2023: COT: Speculators add further fuel to gold rally
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