Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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Gold getting ready for action
Ole Hansen
Head of Commodity Strategy
Since the mid-May mini collapse, when short-covering took the dollar sharply higher and metals lower, gold has increasingly been settling into a relatively tight range around $1,300/oz. The run-up to what is expected to be the seventh US rate hike in the current cycle has once again sapped investor confidence as well as demand for the yellow metal.
We believe, however, that the risk of another cat-out-of-the-bag rally has increased – not least considering the dollar rally showing signs of pausing following the recent run-up, US-China trade worries not going away, and rising inflation concerns keeping US real yields rangebound.
Gold traded lower ahead only to rally following most of the previous six rate hikes in this cycle, not least considering the dovish manner in which the Federal Open Market Committee presented these rate hikes.
Paper investments have faded with hedge funds' position near a two-year low while total holdings in exchange-traded funds backed by gold has dropped 34 tons to 2,206 tons from a five-year high last month. In the futures market, the aggregate open interest and the weekly trading range have both hit a six-month low.
These observations are all pointing towards an imminent move in gold and while the downside may still be in play, the low level of hedge fund participation makes us believe that the direction that could receive most momentum would be to the upside.
However, a hawkish hike later today carries the risk of sending the dollar and bond yields higher and gold lower. The key levels to look out for has remained the same for some time now: a sustained break below $1,286/oz would call into question the rally from the December low while a move above $1,308/oz, the 200-day moving average, is likely to attract renewed technical and momentum buying from funds currently underweight in gold.
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