Head of Commodity Strategy
Summary: Gold is currently consolidating within its well established uptrend, with the drop back below $2000 being driven by rising US Treasury yields supporting a stronger dollar and traders dialing back rate cut expectations. We maintain a bullish outlook with the biggest short-term challenge being the risk of long liquidation from momentum-focused hedge funds, a group of speculators that have been strong buyers in recent months
Today's Saxo Market Call podcast
Global Market Quick Take: Europe
The gold market is currently consolidating within its seven-month-old uptrend as focus turns to support in the $1975 area.
The drop back below $2000 has been driven by rising US Treasury yields supporting a stronger dollar and traders dialing back rate cut expectations.
We maintain a bullish outlook with the biggest short-term challenge being the risk of long liquidation from momentum-focused hedge funds, a group of speculators that have been strong buyers in recent months
Gold trades back below $2000 on a combination of a stronger dollar, rising US Treasury yields and the market pricing in a reduced pace of US rate cuts. All developments that in the short term may rattle a few nerves and potentially drive a deeper correction, especially if the market does not hold support around $1975, an area that attracted fresh buying on several occasions last month.
As gold’s current uptrend extends to a seventh month, the market has once again turned its focus towards consolidation. Since setting up a solid floor just above $1600 last November, the yellow metal has been trading higher within a 200-dollar channel, currently providing support around $1920. Ahead of that level several levels may provide additional support, starting as mentioned with $1975, followed by $1959 (February 2 peak), and $1941 (50% retracement of the latest run up from March 8).
The latest weakness, leading to yesterday’s slump back below $2,000 was triggered by robust US retail sales data and together with sticky inflation and a still robust job market, traders have started to dial back expectations for rate cuts this year. From a peak near 1% at the start of the month, the June-December SOFR spread is currently pricing in a 0.67% cut this year, while a 1.75% reduction remains priced in during the next twelve months.
Several Fed speakers were on the wires on Tuesday, and many pushed for more rate hikes. Thomas Barkin (non-voter) said he is still not convinced that inflation is defeated and would be "comfortable" with more increases. Loretta Mester (non-voter) said she thinks rates aren't yet sufficiently restrictive. Lorie Logan (voter) was neutral and noted that a slower pace and vouched for a slower pace considering stability risks. John Williams (voter) was less hawkish, highlighting that the demand and supply in the economy is moving back into a balance as Fed hikes filter through the economy. Clearly, most voters are turning cautious while the other members on the committee still see further interest rate hikes.
The table below shows gold’s recent weakness coinciding with a pick-up in US yields, some of which is being driven by the US debt ceiling debacle which ultimately could see the US run out of borrowing capacity. Negotiations are still ongoing and until a deal is struck, hopefully before the weekend, the dollar will remain bid, thereby adding some additional headwinds to commodities in general and precious metals in particular.
Apart from the headwinds mentioned, gold’s potential biggest short-term challenge stems from its recent success in attracting demand from momentum focused hedge funds. Since early March hedge funds bought 122,520 lots of COMEX gold futures, and a deeper setback than the one already seen would likely trigger long-liquidation, not because these funds look for a change in direction but simply in order to reduce exposure while waiting for the next opportunity. Long-term focused investors using ETFs to gain exposure have been steady but not aggressive buyers of gold since March. During this time total holdings have risen by 72.5 tons to 2,923 tons but remain close to 400 tons below the recent peak from April 2022 and 525 tons below the record peak from October 2020.
While the short-term outlook points to further consolidation as we await incoming economic data, we keep an overall bullish outlook for gold, driven among others by the following expectations, some of which are currently on hold as per the above update.
Continued dollar weakness as yield differentials continue to narrow.
Peak Fed rates, when confirmed, have historically on the three earlier occasions during the past 20 years supported strong gains in gold in the months and quarters that followed
Central bank demand look set to continue as the de-dollarization focus continues to attract demand from several central banks. One unknown is how price sensitive, if at all, this demand will be. We suspect it will be limited, with higher prices not necessarily preventing continued accumulation.
We believe inflation is going to be much stickier with market expectations for a drop back to 2.5% perhaps being met in the short-term but not in the long-term, forcing a gold supportive repricing of real yields lower.
A multipolar world raising the geopolitical temperature
Low investor participation adding support should the above-mentioned drivers eventually provide the expected breakout.
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Head of Fixed Income Strategy
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Head of Commodity Strategy
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Head of Fixed Income Strategy
Quarterly Outlook
Head of Commodity Strategy
Disclaimer
The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.
Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-gb/legal/disclaimer/saxo-disclaimer)