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 look for momentum on fresh dollar weakness
Ole Hansen
Head of Commodity Strategy
Summary: Gold, and with that also silver, continues to trade sideways within a well-defined range, and not surprisingly being the most interest rate and dollar sensitive commodity, the direction has for a while now been dictated by the ebb and flow of movements in U.S. Treasury yields and the dollar. With real yields and the dollar both ticking lower after a stronger-than-expected U.S. CPI, the metals are once again, but so far without much conviction, attempting to challenge key resistance.
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Spot Gold (Ticker: XAUUSD)
Spot Silver (Ticker: XAGUSD)
Gold/silver ratio (Ticker: XAUXAG
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Spot Gold (XAUUSD) continues to trade sideways within a well-defined range between $1675 and $1765, and not surprisingly being the most interest rate and dollar sensitive commodity, the direction has for a while now been dictated by the ebb and flow of movements in U.S. Treasury yields and the dollar. Adding to this the loss of momentum which for several months has resulted in lower participation from investors in both futures and exchange-traded funds.
Total holdings in bullion-backed exchange-traded funds have seen almost daily reductions since January, and from the peak last October holdings are currently down by 10%, a reduction of this magnitude was last seen in Q4 2016, just before the price bottomed out and embarked on the journey that took it to $2075/oz last August.
However, while we are waiting for a breakout of the current range – up or down - the outflows from ETF’s has been grinding to a halt, an indication that most of the selling at current levels has now been done. Not least due to strong demand from central banks, which according to the World Gold Council saw March buying from India and Hungary to the tune of 223 tons, a figure that almost off-set the total year-to-date reduction in total holdings of 229 tons.
While rates and the dollar sets the overall direction, it is clear that the loss of momentum has been a major reasons why money managers at the beginning of March had cut bullish futures bets by 85% from the peak last February. During the past month, however, buyers have started to return and the recent rejection below $1680 helped trigger a 53% increase in the net long to 7.7 million ounces during the week to April 6.
Gold received a boost yesterday from a weaker dollar and favorably developments in the Treasury market where stronger-than-expected US CPI drove inflation expectations higher and real yields lower. We maintain a short-term neutral view on gold and while the twice rejection below $1680 points to a potential bottom it still needs confirmation, hence the focus on $1765.
Silver has been struggling to find traction following the early February spike and subsequent collapse. The brief spike above $30 that was inspired by the short squeeze in GameStop helped trigger a 11.2 million spike in silver-backed ETF holdings. While the price has since corrected by 15% investors have only sold back 9 million ounces, with some under-water positions still holding out for a recovery.
In order to find signs of renewed silver strength we watch the gold/silver ratio. After putting in several peaks around 70 ounces of silver to one ounce of gold, the ratio has reversed lower and as per the chart below some additional relative strength is likely to emerge on a break below the technical level at 68.50.
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