Head of Commodity Strategy
Summary: Global stock markets surged on Tuesday while bond yields and the dollar slumped after an unexpected slowdown in US inflation once again increased bets that the Federal Reserve’s rate hiking cycle is over. Having just found support near $1930, the news helped send gold higher, but it was the semi-industrious and recently beaten down metals like silver and platinum that benefitted the most from the prospect for lower funding cost.
Key points in this note
Global stock markets surged on Tuesday after an unexpected slowdown in US inflation once again increased bets that the Federal Reserve’s rate hiking cycle is over. Bond yields slumped while the dollar took the biggest one-day hit in a year as the market priced in a full one percent rate cut for next year with the first now priced to occur in June, from July prior to the report. Having just found support near $1930, the news helped send gold higher, but it was the semi-industrious and recently beaten down metals like silver and platinum that benefitted the most from the prospect for lower funding cost.
US October CPI came in below expectations with the Y/Y easing to 3.2% from 3.7%, while the core metrics were also soft, rising 4.0% Y/Y, beneath the prior and expected 4.1%. The softness triggered re-pricing of future rate cuts with the SOFR futures pointing dialing further back on the risk of additional rate hikes, instead pricing in a full 1% cut next year and followed by a through in rates by December 2025 at 3.75%.
We have for some time been arguing the Fed is done hiking rates, but we also acknowledge that central bankers cannot express this view in public as they would risk boosting risk sentiment to the point it loosens financial conditions too soon. A predicament that was on clear display last week when Federal Reserve chair Jerome Powell was forced to dial back the dovish reprising seen following the November 1 FOMC (Federal Open Market Committee) meeting, when Powell strongly hinted that the Fed is done hiking rates.
However, with the FOMC focusing on inflation, rather than the current economic strength yesterday’s CPI print helped reignite the animal spirit among traders, the result being sharply higher equity markets, especially those beaten down sectors that have struggled recently amid elevated levels of debt and an increasing cost of servicing that debt. Examples of themes benefiting were biotech, bubble stocks, and energy storage and renewable energy, the latter two being themes that support demand for metals such as silver and platinum. See the latest update from Peter Garnry, Saxo’s head of equity strategy, titled “Green stocks rally on lower inflation; earnings update”
After rallying by close to 200 dollars last month, gold went through a much-needed period of consolidation, during which time it did not respond (positively) to fresh yield and dollar softness following the mentioned FOMC meeting on November 1 when Powell hinted the Fed was done. With US ten-year bond yields more than 50bps below 5%, now key resistance, the risk to US fiscal policy, and especially whether the recent jump in both real and nominal yields would end up ‘breaking something’, has faded a bit, thereby reducing some of the support which helped propel gold sharply higher last month. Instead, the bullion market should now reestablish its negative correlation to yields and the dollar, however, following last month strong rally it could be argued that that additional dollar and yield weakness will be needed to send prices back above $2000 towards a fresh record high.
Apart from central bank buying, which continues at a record pace, leverage fund accounts, such as hedge funds and CTA’s as well as investor demand for ETFs remain key to underpin a continued rally in gold. We believe the prospect for peak rates, once confirmed, leading to an eventual lowering of the cost of holding non-interest paying precious metal positions, will be the trigger for the next move higher. Until then we keep our patiently bullish view on gold and see setbacks as a buying opportunity.
After last month’s aggressive 200-dollar rally, supported by near record buying from hedge funds and CTA’s, gold reversed lower on profit taking before bouncing after finding support at the 200-day moving average level around $1935. With positive momentum returning as seen through the break above the 21-day moving average, spot gold will likely look at the recent consolidation low around $1980, while a break above would open for a revisit to and above $2000.
As mentioned, the prospect for lower funding cost supporting liquidity intensive industries, some of which needs platinum and silver, has supported a strong rebound in these two beaten down and under owned metals. In addition, the recent weakness relative to gold can also be partly explained by the absence of central bank demand for these metals. Hedge funds in the week to November 7 held a 105k contract (10.5m ounces) net long in COMEX gold futures, more than 20k above the one-year average. Meanwhile in silver funds held a near neutral position of 2.2k contracts, some 10k below the one-year average while a small net short of 1.4k contracts were held in platinum, some 8k below the one-year average.
Continued focus on peak rates will allow these two very interest rate sensitive metals to play catchup with gold. In his latest update Kim Cramer, our technical analyst, provides his view on the current setup here.
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Head of Fixed Income Strategy
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Head of FX Strategy
Quarterly Outlook
Head of Commodity Strategy
Quarterly Outlook
Head of FX Strategy
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)