Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
Gold focus remains squarely on trade talk news
Ole Hansen
Head of Commodity Strategy
Summary: Gold has returned to the top end of its 30-dollar range with most of the price action being driven by alternating signals from the ongoing trade talks between the US and China. For several reasons mentioned below we maintain a bullish outlook into 2020.
Gold has spent the past couple of days attempting to break out of the 30-dollar range established during the past month. The latest move, like so many others in recent months, being driven by comments from Beijing and not least Washington related to the ongoing efforts to agree on a phase one trade deal.
These efforts received a knock on Tuesday when President Trump downplayed the urgency of a deal saying that it might be best to wait until after the November 2020 election. China meanwhile aggrieved by recent Senate votes on Hong Kong and Xinjiang said that the US will pay the price and that they on trade would not set any timeline or deadline.
However, the gold rally and drop in stocks and yields that these comments helped trigger became unstuck earlier today when Bloomberg News joined in by writing that according to sources US and China is moving closer to a trade deal despite the heated rhetoric.
These developments highlight the pain investors and traders across the world have felt in recent months with alternating news creating the current dump and pump price action. With end of year coming up we risk seeing liquidity go down and volatility up with traders either opting to close their books or move to the sideline while waiting for tangible news on the trade front.
Later today the trade talk focus may temporarily be pushed aside when the US ISM Non-Manufacturing Index for November is released at 15:00 GMT. Market expectations point to a small reduction to 54.5 from 54.7 previously, but still well into expansion territory. The non-manufacturing sector accounts for a majority of the U.S. economy hence the importance.
Below some of the key charts we currently watch in order to gauge the outlook for gold and with that also silver, the semi-precious kid brother. Speculators have since the October peak cut bullish futures bets by one-third to 206,000 lots (20.6 million ounces). With those now sidelined unlikely to engage unless we see renewed momentum to the upside through a break above $1517/oz, the October high. Non-leveraged investors using bullion-backed exchange traded funds have during the same period only cut total holdings by 1.5%. A relatively small reduction like this confirms our belief that the current correction is a weak one as long the price stays above $1380/oz.
US ten-year real yields remain close to a gold supporting zero while two further 25 bp. US rate cuts are expected during the next twelve months, two less than what we at Saxo expect. With trade talks and trade war currently attracting so much attention we also need to keep a close eye on the Chinese currency. We use the offshore traded USDCNH in the graph below and we find that the positive correlation between gold and CNH is currently close to the highest since mid-2016. It highlights how the Yuan increasingly has become the trade talks proxy and gold the hedge against a potential fallout.
The outlook for gold remains in our opinion constructive above $1380/oz with the prospect for further upside emerging into 2020. This belief is based on the following assumptions:
- The Federal Reserve has lost control and will cut rates sooner and faster than expected;
- The dollar is potentially on its final leg of strength;
- A prolonged US-China trade war raising inflationary risks;
- Central bank demand to remain strong for various reasons, one being de-dollarization;
- Robust demand for bullion-backed ETF’s.
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