Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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Gold held down by yuan, yields
Ole Hansen
Head of Commodity Strategy
Summary: While semi-industrial and industrial metals continue to show signs of recovering, the same can not be said about gold with the yellow metal glued to a tight range around $1,200/oz.
While semi-industrial and industrial metals alike continue to show signs of recovering, the same can not be said about gold. During the past month, traders have increasingly been struggling to find the right direction and a tight range has emerged during this time with gold glued to the $1,200/oz level, having closed within $2/oz on more than half of those days.
Industrial metals as seen through copper recovered strongly last week when China promised tax cuts and increased spending in response to the escalating trade war. Such an announcement from the worlds biggest consumer of metals was then backed up by news that Chile’s state owned Codelco, the world’s biggest producer, was seeing rising demand and limited supply.
Following last week's strong recovery, HG Copper is now facing a band of resistance between $2.87 and $2.97/lb, the equivalent of $6,400 and $6,600/MT on LME Copper.
The tailwind from industrial metals has allowed both silver and platinum to recover both in real terms and relatively against gold. The gold-silver ratio has fallen to a three-week low, and is now below 83 from a 10-year high above 85. Platinum, meanwhile, has outperformed gold by more than $50/oz since July 2 and is currently trading at $370/oz, a six-month low.
With silver and platinum showing signs of life, the lack of movement in gold speaks volumes about its continued attachment to the Chinese yuan, and about the renewed rise in bond yields to a certain extent as well.
While the dollar has shown some gold-supportive signs of topping out over the past week, not least against the euro, the yuan remains weak. In fact, today saw the onshore yuan decline for a third session after the People's Bank of China set the daily fixing at 6.8571, the weakest level since August 24. This could indicate that the PBoC, instead of having drawn a line in the sand, is only managing the movements in order to avoid a sharp decline.
In addition, the latest run up in US bond yields, both notional and real, ahead of today’s Federal Open Market Committee meeting has also weighed on sentiment. The rise back above 3% in 10-year notes and the lack of movement in inflation expectations (breakeven) allowed the 10-year real yield to reach a seven-year high at 0.95% earlier this week.
With the market putting the risk of a third 2018 rate hike close to 100%, the focus will instead be on the forward guidance from the FOMC with regard to future rate hike expectations.
The continued yuan weakness and pre-FOMC nerves has sent gold back below $1,200/oz today. The chart shows a price development that for several months now has caused no headaches for funds holding a record short position in COMEX gold futures. For that to change, gold needs to break back above $1,212 and potentially even $1,239/oz before a recovery can be put in motion.
Until such time, the yellow metal remains stuck with better opportunities potentially presenting themselves in the other metals.
Until such time, the yellow metal remains stuck with better opportunities potentially presenting themselves in the other metals.
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