Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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Investors cash in: Gold and silver see year-end profit taking
Ole Hansen
Head of Commodity Strategy
Key points in this update:
- Gold and silver investors are increasingly turning defensive ahead of year-end as they seek to protect and lock in gains following a very strong year
- Both metals currently trade up more than 27% on the year—a very impressive performance considering the headwind from a stronger dollar and a renewed rise in US Treasury yields
- We maintain a bullish outlook for gold and not least silver in 2025 amid an uncertain world driving demand from central banks and investors worried about fiscal instablity, geo-political concerns, a US stock market increasingly out of balance, and sticky inflation.
Gold and silver investors are increasingly turning defensive ahead of year-end as they seek to protect and lock in gains following a very strong year. This year has seen gold’s record-breaking rally deliver the best annual return since 2010, while silver has managed to keep up with gold, reaching a 12-year high during the October run-up to the US presidential elections.
Both metals currently trade up more than 27% on the year—a very impressive performance considering the headwind from a stronger dollar, which has climbed more than 6% against a basket of major currencies, currently on track to record its best year in a decade. In addition, US bond yields have been rising despite the start of a rate-hiking cycle, amid worries about fiscal instability as governments—particularly in the USA—continue to spend money they do not have, leading to an increased debt burden.
Note below, the strong correlation between a rising yield gap between the US and Europe and the weaker euro against the dollar. In the short term, relative US yield strength, and investor demand for US equities, may continue to limit gold and silver’s upside potential as it drives the dollar higher.
While the US rate-cutting cycle began in 2024, the prospect of aggressive cuts began to deflate almost as soon as the first cut was delivered back in September. From an expected December 2025 low around 2.75%, the Fed Funds futures market is now pricing in fewer than three additional cuts, including the one the FOMC is expected to deliver this Thursday, to around 3.9% by this time next year.
So why have precious metals, despite these apparent headwinds, been doing so well in a year that has also seen equity markets perform very well, albeit concentrated in a few (US) megacap stocks?
One year ago, when we wrote our Year of the Metals 2024 outlook, we foresaw gold and silver prices trading higher on a combination of US recession risks and falling inflation, leaving the door wide open to rate cuts. Additionally, these metals were already being supported by safe-haven bids following the October 2023 Hamas attack on Israel and Houthi rebels attacking ships in the Bab el-Mandeb Strait, thereby reducing shipping traffic through the Red Sea. On top of these factors, central bank buying was expected to continue due to a diversification focus away from the USD and US Treasury bonds.
While a US recession failed to materialise and US rate-cut expectations faded, most of the developments that have supported these strong gains are unlikely to fade anytime soon and, therefore, will continue to support prices of both metals into 2025. They are several, and while we have mentioned most already, here is a quick summation:
- Central bank buying to diversify holdings away from the US dollar and government bonds.
- Interest rate cuts reducing the "cost" of holding gold compared to investing in secure short-term government bonds.
- Sticky inflation emerging as a theme, helping to offset the potential negative impact of reduced rate cut expectations.
- Safe-haven demand amid a fractured world with unresolved conflicts in the Middle East and Russia-Ukraine, along with risks of trade wars and tariffs lifting inflation in 2025.
- Chinese investors turning to gold amid record-low savings rates and property market concerns.
- Concerns over fiscal instability as governments around the world increase debt burdens, not least in the US as President-elect Trump rolls out his radical and high cost policies.
All in all, these developments may continue to play an important role into 2025 and beyond, thereby providing precious metals with enough support to reach fresh highs in the coming year(s). With this in mind, we see gold reaching USD 3,000 next year, representing a 10% gain from current levels, while silver, supported by tightening supply and tailwind from industrial metals, may do even better. Based on the XAU/XAG ratio returning to 75 (ounces of silver to one ounce of gold) from the current level around 85, we could see silver targeting USD 40, representing a 25% upside.
Will gold and silver see another Santa rally?
This headline was given to an article I wrote a year ago in response to data that showed gold and silver had both seen strong December rallies in the previous six years. As it turned out, silver failed while gold went on to record a small 1.3% gain to end 2023 at USD 2,062. Fast forward and halfway through the month chances of a repeat have diminished, and while the fundamentally supportive outlook into 2025 in our opinion has not changed significantly, another positive month of December is currently being challenged by dollar and yield strength and the temptation to reduce positions following a record-breaking year.
Recent commodity articles:
17 Dec 2024: Podcast: A wild ride in 2025 awaits
16 Dec 2024: COT Report: Agriculture in demand; Traders lift bets against the euro
13 Dec 2024: Commodities weekly: The forward curve and impact on returns
10 Dec 2024: Brazil's coffee crisis pushes Arabica to all-time high
9 Dec 2024: COT Report: Speculators bought crude and gold: euro shorts reach 4-year peak
6 Dec 2024: Commodities weekly: Copper rises on China optimism; OPEC delay signals crude weakness
3 Dec 2024: COT: Mixed week in commodities as dollar buying continued
29 Nov 2024: Commodities take a breather after action-packed November
28 Nov 2024: Coffee surges to a 47-year high
28 Nov 2024: Choppy gold market turns to Santa for December support
27 Nov 2024: Podcast: Will gold enjoy a Santa rally for the eight year in a row?
25 Nov 2024: COT Report: USD long jumps; Mixed week in commodities
22 Nov 2024: Commodity weekly: Strongest performance since April
19 Nov 2024: Gold and silver rise on Russia-US tensions
18 Nov 2024: COT: Limited dollar demand despite strength; Acclerated metals selling
11 Nov 2024: COT: Speculators bought energy and grains, sold gold ahead of elections
8 Nov 2024: Commodity weekly: Mixed response to Trump 2.0
6 Nov 2024: Podcast: US election and the market reactions, including commodities
6 Nov 2024: Trump and Republican victories spark commodity decline
4 Nov 2024: COT: Speculators flock to dollars, exit commodities ahead of US election
1 Nov 2024: Commodity weekly: Some weakness seen ahead of critical week
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