Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
Is it all over for precious metals?
Ole Hansen
Head of Commodity Strategy
Summary: Bullish sentiment in both gold and silver has staggered this week against a backdrop of multiple risk-positive factors. Is this the end of the road for the recent run in precious metals?
Gold, silver and platinum strength have seen a major challenge this past week. Here, we take a look at the reasons behind the reduced appetite for precious metals and ponder whether the recent rally has run out of steam.
Several events during the past few weeks helped change the sentiment away from safe-haven assets:
• Increased speculation about a successful outcome of the US-China trade talks.
• Stronger than expected US Q4’18 GDP pushing back, at least temporarily, concerns about the economy sliding into recession.
• Rebound in Federal Reserve hike odds following recent testimonies on Capitol Hill from Fed chair Powell.
• Reduced risk of a hard Brexit as PM May gives in to pressure from members of her party.
• Profit-taking from gold investors worrying that the $1,360-80/oz band would once again offer an impenetrable barrier of resistance.
The table below shows the performance across some of the key markets which help determine the appetite for gold at any given time. While the rally in stocks has provided some headwinds since January, it was renewed strengthening of the dollar and bond yields which help accelerate the sell-off since last Friday’s stronger than expected US data.
Several events during the past few weeks helped change the sentiment away from safe-haven assets:
• Increased speculation about a successful outcome of the US-China trade talks.
• Stronger than expected US Q4’18 GDP pushing back, at least temporarily, concerns about the economy sliding into recession.
• Rebound in Federal Reserve hike odds following recent testimonies on Capitol Hill from Fed chair Powell.
• Reduced risk of a hard Brexit as PM May gives in to pressure from members of her party.
• Profit-taking from gold investors worrying that the $1,360-80/oz band would once again offer an impenetrable barrier of resistance.
The table below shows the performance across some of the key markets which help determine the appetite for gold at any given time. While the rally in stocks has provided some headwinds since January, it was renewed strengthening of the dollar and bond yields which help accelerate the sell-off since last Friday’s stronger than expected US data.
Delayed Commitments of Traders reports from the US CFTC found that hedge funds jumped into gold futures in the run-up to the failed attempt at $1,350/oz. The 69% increase in the net-long during the week to February 19 left many recent established longs under water once the price reversed lower. Investors in exchange-traded funds backed by bullion, meanwhile, have been continued sellers since early February.
The reductions culminated last Friday when 11 tons were withdrawn, the biggest one-day reduction in total holdings since March 21 of last year.
The reductions culminated last Friday when 11 tons were withdrawn, the biggest one-day reduction in total holdings since March 21 of last year.
The selling pressure increased last week after the uptrend from November was broken. We view the current sell-off as a correction within the current uptrend. While we maintain a bullish outlook above $1,276/oz, we also have to conclude that a deterioration in global stocks, as well as increased geopolitical and/or macroeconomic risks are needed to give gold enough momentum to mount a challenge at the strong band of resistance between $1,360 and $1,380/oz.
We believe that the stock market, while not yet showing any real warning signs, may be at risk of a correction once the trade deal is announced – not least given how far the belief in a deal has carried the market already. The biggest short-term risk to our constructive outlook remains the dollar, which may put in a final push to the upside before running out of steam, despite having remained rangebound for months.
We believe that the stock market, while not yet showing any real warning signs, may be at risk of a correction once the trade deal is announced – not least given how far the belief in a deal has carried the market already. The biggest short-term risk to our constructive outlook remains the dollar, which may put in a final push to the upside before running out of steam, despite having remained rangebound for months.
Silver has already corrected 50% of its November-February rally as it remains out of favour with investors looking for better opportunities in other metals such as platinum and copper.
Platinum, supported by surging palladium prices, has seen relative value traders return to bring down the discount to gold; the same, however, can not be said about silver. The lack of demand is best reflected in the gold-silver ratio, which has moved back above 85 (silver ounces to one gold ounce), not far from the quarter-century closing high at 86.2 reached last November.
Platinum, supported by surging palladium prices, has seen relative value traders return to bring down the discount to gold; the same, however, can not be said about silver. The lack of demand is best reflected in the gold-silver ratio, which has moved back above 85 (silver ounces to one gold ounce), not far from the quarter-century closing high at 86.2 reached last November.
Platinum, which up until recently enjoyed a tailwind from rising gold and surging palladium prices, also ran into profit-taking after failing to break the November high at $877/oz. Having retraced half of the February run-up in just three days the metal is once again looking for support around $830/oz (as per the chart below).
A near-$700 record discount to palladium is likely to provide the support needed for the metal to further claw back some of its discount to gold, currently at $445/oz and down from a record $525/oz just three weeks ago.
Platinum’s initial surge and subsequent sell-off shows the price impact on metals, where a lack of liquidity can quickly turn from being an investor's best friend to their worst enemy.
A near-$700 record discount to palladium is likely to provide the support needed for the metal to further claw back some of its discount to gold, currently at $445/oz and down from a record $525/oz just three weeks ago.
Platinum’s initial surge and subsequent sell-off shows the price impact on metals, where a lack of liquidity can quickly turn from being an investor's best friend to their worst enemy.
HG Copper has been in corrective mode the past week after finding resistance ahead of $3/lb. The rally until then was driven by trade talk hopes and a rundown in stocks held at warehouses monitored by the London Metal Exchange, the worlds largest industrial metals exchange, and COMEX in New York.
While overall LME stockpiles have dropped to 118,000 tons, the lowest since 2008, the drop in freely available stocks has fallen close to levels last seen in the 1970s. These developments have led to speculation about a tightening market, as can be seen through the widening backwardation between LME copper cash and the three-month contract.
It is worth noting, however, that deliverable stocks at the Shanghai Futures Exchange in China have continued to rise since early January in tandem with these developments.
While overall LME stockpiles have dropped to 118,000 tons, the lowest since 2008, the drop in freely available stocks has fallen close to levels last seen in the 1970s. These developments have led to speculation about a tightening market, as can be seen through the widening backwardation between LME copper cash and the three-month contract.
It is worth noting, however, that deliverable stocks at the Shanghai Futures Exchange in China have continued to rise since early January in tandem with these developments.
High-grade copper was a star performer during February on the back of tightening supply and optimism on several Chinese fronts. However, we maintain our view from last week that the current consolidation has further to go for the aforementioned reasons, with the market taking aim at the area of support below $2.86/lb.
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