Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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Gold and silver turn defensive on reduced Fed rate-cut optimism
Ole Hansen
Head of Commodity Strategy
Summary: We keep a bullish outlook for gold and silver, but for now, both metals are likely to remain stuck until we get a better understanding about the timing, pace and depth of future US rate cuts. During the past week, the short-term rates market has gone from pricing in more than six 25 basis points US rate cuts this year to less than five, while bets on the first cut being delivered at the March 20 meeting has slumped to less than 20%. All developments that highlight just how volatile markets can be in the runup to a change in monetary policy.
We keep a bullish outlook for gold and silver, but for now, both metals are likely to remain stuck until we get a better understanding about the timing, pace and depth of future US rate cuts. Until the first cut is delivered, the market may at times run ahead of itself, in the process building up rate cut expectations to levels that leave prices vulnerable to a correction. With that in mind, the short-term direction of gold and silver will continue to be dictated by incoming economic data and their impact on the dollar, yields and not least rate cut expectations.
During the past week, the short-term rates market has gone from pricing in more than six 25 basis points US rate cuts this year to less than five, while bets on the first cut being delivered at the March 20 meeting has slumped to less than 20%. All developments that highlight just how volatile markets can be in the runup to a change in monetary policy. Following last week’s FOMC meeting Fed Chair Powell said it was not likely that the committee will reach a level of confidence in time for the March meeting to begin rate cuts. He went on to say that given economic growth at a “solid pace,” a "strong" labor market, and continued declines in inflation, the Fed can eventually reduce interest rates carefully.
With these cautious words still ringing, Friday’s strong US job report and Monday’s rebound in ISM Services employment and prices paid brought home the realization that rate cuts may not be delivered at the expected pace, and the market impact has been clear with broad dollar strength taking the Bloomberg Dollar index, which also includes an under-pressure yuan, to a November high while US 10-year Treasury yields surged back towards 4.2% resistance after being rejected near 3.8% last week.
Precious metal traders trying to navigate this constantly changing outlook has become a relatively painful exercise, especially for those looking for short-term momentum opportunities. As per the gold chart below, the market looks increasingly stuck with physical demand from central banks and retail demand in China and India, as well as Middle East concerns providing a soft floor under market around $2000 while an upside break through $2065 looks difficult until we have a firmer idea about the mentioned timing, pace and depth of incoming rate cuts.
Our gold monitor below highlights some of the recent developments, not least gold’s ability to stay supported despite the recent dollar strength and lowering of rate cut expectations. On a correlation basis the movements in real yields and the SOFR futures contracts currently command the highest negative correlation. The fact gold has ‘only’ lost around 2% year-to-date despite the stronger dollar and a pickup in bond yields and reduced rate cut expectations is likely to have been driven by geopolitical concerns related to tensions in the Middle East, and not least continued strong demand for physical gold from central banks and China’s middle class attempting to preserve their dwindling fortunes caused by the property market crisis and one of the world’s worst performing stock markets as well as a weakening yuan.
In their 2023 review, the World Gold Council described another year of blistering demand, led by central bank buying and jewelry consumption. Central bank buying reached 1,037 tons, just 45 tons short of the 2022 record, while jewelry consumption despite the high price environment held steady at 2,093 tons. According to the report, global ETFs saw a third consecutive annual outflow of 244 tons compared with 110 tons in 2022 as asset managers and other investors looked elsewhere amid the rising funding and opportunity cost compared to holding a position in bonds.
Meanwhile, following four weeks of net selling, managed money traders such as hedge funds and CTA’s held a reduced 72k lots or 204 tons long on January 30, almost half the position that was held at the start of the year. Again, the limited (negative) price impact of this selling highlights an underlying physical demand which is not visible in the so-called ‘paper’ market which includes ETFs where outflows since the beginning of the year have reached 54 tons.
Silver, down around 6% year-to-date, once again trades heavy as weakness from industrial metals spill over. It highlights a metal where the main directional input is supplied by movements in gold and copper with the latter currently being negatively affected by a weak yuan amid concerns about the economic outlook in China. Support just below $22 is the key to prevent an even bigger rout, while resistance has been set up around $23.25 ahead of the 50- and 200-day moving averages.
Commodities articles:
2 Feb 2024: Commodity weekly: Tight supply adds fuel to uranium and cocoa rally
1 Feb 2024: Commodities: January performance and ETF flows
30 Jan 2024: Gold and silver look to FOMC for direction
29 Jan 2024: Video: Unpacking the reasons behind soaring coffee prices
26 Jan 2024: Commodity weekly: Back in black supported by China stimulus
25 Jan 2024: Grains up on short covering; softs supported by tight supply
24 Jan 2024: Disruption risks drive specs into Brent; distorted EIA report up next
23 Jan 2024: Silver and copper in focus after recent declines
19 Jan 2024: Commodity weekly: Middle East, US rates, Bitcoin ETFs & Freight rates
17 Jan 2024: Natural gas focus switch from cold to milder weather ahead
16 Jan 2024: Data dependent precious metals continue their bumpy ride
12 Jan 2024: Commodity Weekly: Geopolitical risks lift crude and gold prices
9 Jan 2024: Q1 Outlook – Year of the metals
5 Jan 2024: Commodity weekly: Bumpy start to 2024
4 Jan 2024: What to watch in crude oil as 2024 gets underway
4 Jan 2024: Podcast: Crude oil and gold in focus as a new year begins
21 Dec 2023: Weather, rates and unrest paint muddy picture for commodities in 2023
19 Dec 2023: Crude and gas pop on Red Sea Disruption Risks
14 Dec 2023: Fed's dovish tilt adds fresh fuel to precious metals
13 Dec 2023: Video - Why gold may enjoy a Santa rally for the 7th year in a row
12 Dec 2023: Video - Investing in Uranium
1 Dec 2023: Commodity weekly: Tight supply risks boost copper; OPEC+ struggles to control crude
30 Nov 2023: Precious metals take top spot for a second month
23 Nov 2023: A nervous crude oil market awaits OPEC's next move
23 Nov 2023: Podcast: Will Santa deliver another golden gift
22 Nov 2023: Will gold and silver see another Santa rally?
17 Nov 2023: Commodity weekly: Crude overshoots; silver the comeback kid
Previous "Commitment of Traders" articles
5 Feb 2024: COT: Speculators chase false crude break; grain short extends further
29 Jan 2024: COT: Squeeze risks after funds sold into rising commodity markets
22 Jan 2024: COT: Commodities short-selling on the rise amid China woes and Fed caution
15 Jan 2024: COT: Grains sector slump continues; Mideast risks lift crude demand
8 Jan 2024: COT: Weakest commodities conviction since 2015
18 Dec 2023:COT: Crude long hits 12-year low ahead of FOMC bounce
11 Dec 2023: COT: An under owned commodity sector raising risk of an upside surprise in 2024
4 Dec 2023: COT: Speculators add further fuel to gold rally
20 Nov 2023: COT: Crude selling slows, grains in demand
14 Nov 2023: COT: Crude long slumps; agriculture sector in demand
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