Quarterly Outlook
Macro outlook: Trump 2.0: Can the US have its cake and eat it, too?
John J. Hardy
Global Head of Trader Strategy
What's next for gold after its best quarter since 2017?
Ole Hansen
Head of Commodity Strategy
Summary: Trump's trade war and the strong dollar weighed heavily on many commodities in 2018 but these factors also sparked a rush into safe havens, causing gold to shine.
The Bloomberg Commodity Index, which tracks a basket of major commodity futures, finished 2018 lower by more than 10%. This was the worst year for commodities since 2015 when crude oil got hammered in response to surging US shale production. In 2018 it was not only the sell-off in crude oil on continued shale oil growth and demand concerns which drove the index lower, as losses were seen across all sectors.
Growth, and with that demand worries, caused by President Trump’s trade war with China, rising dollar funding costs and a generally strong dollar, helped send growth-dependent commodities, such as industrial metals sharply lower while creating renewed demand for safe havens, especially gold and with that also silver together with the minnow of palladium where tight supply has lent strong support.
Growth, and with that demand worries, caused by President Trump’s trade war with China, rising dollar funding costs and a generally strong dollar, helped send growth-dependent commodities, such as industrial metals sharply lower while creating renewed demand for safe havens, especially gold and with that also silver together with the minnow of palladium where tight supply has lent strong support.
While still down on the year a late surge helped precious metals end up being the best performing sector in the Bloomberg Commodity Index. Especially the last quarter turned out to be very friendly as the deteriorating outlook for both US and global growth led to speculation that the US Federal Reserve would refrain from hiking interest rates much further. Adding to this was the worst US stock market performance in any December since the 1930s, lower US government bond yields and a weaker dollar, especially against the Japanese yen.
The table below highlights these developments and the impact on investor behaviour. Those looking for a longer-term bet on gold tend to use exchange-traded funds and this sector saw the biggest increase in total holdings since Q1-2017. Hedge funds, meanwhile, which in early October held a record net-short in COMEX gold futures of 10.3 million ounces, finally turned net-long at the beginning of December. Please note that due to the US government shutdown the CFTC has so far not been able to publish data covering the week the December 24. It is very likely given the current stalemate between Trump and Congress that the report covering the final week of 2018 will also be delayed beyond the usual publication date this Friday.
The table below highlights these developments and the impact on investor behaviour. Those looking for a longer-term bet on gold tend to use exchange-traded funds and this sector saw the biggest increase in total holdings since Q1-2017. Hedge funds, meanwhile, which in early October held a record net-short in COMEX gold futures of 10.3 million ounces, finally turned net-long at the beginning of December. Please note that due to the US government shutdown the CFTC has so far not been able to publish data covering the week the December 24. It is very likely given the current stalemate between Trump and Congress that the report covering the final week of 2018 will also be delayed beyond the usual publication date this Friday.
The outlook for gold into 2019 looks promising at this stage. We believe that it may take some time for stocks to recover with news from US-China trade negotiations and fourth quarter earnings likely to set the short-term direction. The Federal Reserve is widely expected to further reduce its current call for another two rate hikes this year. The dollar, as usual, holds the key for gold and at this stage we see the risk of further dollar weakness, although it may not fully emerge before the second half.
Spot gold is currently testing $1,287/oz, the 61.8% retracement of the 2018 sell-off. While the 14-day RSI at 75 points towards the need for consolidation a break above is nevertheless likely to attract additional momentum buying. While the current hedge fund position is unknown the relative small net-long on December 18 is likely to have increased further into the quiet Christmas and New Year trading period.
Spot gold is currently testing $1,287/oz, the 61.8% retracement of the 2018 sell-off. While the 14-day RSI at 75 points towards the need for consolidation a break above is nevertheless likely to attract additional momentum buying. While the current hedge fund position is unknown the relative small net-long on December 18 is likely to have increased further into the quiet Christmas and New Year trading period.
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