Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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Gold prices ebb and flow with dollar and US rate expectations
Ole Hansen
Head of Commodity Strategy
Summary: The direction of precious metals continues to be dictated by incoming US economic data, as they eventually will determine the direction the US Federal Reserve decides to go on rates. As a result an end of August rally in gold and silver has been partly reversed after manufacturing and services PMI both beat expectations. In addition, the dollar at a six month high has also been adding some downside pressure while rising oil prices have cushioning the fall given their potential impact on inflation and growth
Global Market Quick Take: Europe
Commitment of Traders: Specs rush back into metals; weak crude conviction
The direction of precious metals continues to be dictated by incoming US economic data, as they eventually will determine the direction the US Federal Reserve decides to go on rates. It was weaker than expected economic data that supported an end of August rally as it lifted expectations of peak rates followed by lower rates in 2024, and in the process forced traders to cover short positions which had been established in response to dollar and bond yield strength.
The softness in US economic data did not last, and during the past week both manufacturing and services PMI showed strength, with the headline and the prices paid component beating expectations, thereby once again raising odds of a quarter-point Fed rate increase in November to more than 50%, and with that another delay to the timing of a precious metal supportive peak rate scenario.
The sharp turnaround in rate expectations from a pause to the risk of another rate hike helped send bond yields higher while reducing the number of expected 25-bps rate cuts next year from five to four. The dollar, however, remains one of gold traders' biggest sources of directional inspiration and this past week the Bloomberg Dollar Index, which tracks a basket of 11 major currencies, reached a six-month high. The jump in crude oil prices following Saudi Arabia’s decision to extend its unilateral production cut until yearend, has probably helped prevent an even deeper setback for gold as it not only raises inflation but also growth concerns.
Silver, meanwhile, has suffered a 5.5% setback so far this month with copper weakness, as the yuan takes a fresh tumble, being added to headwinds being created by lower gold prices. In addition, silver was left exposed to long liquidation after hedge funds in a two-week period to August 29 bought silver futures at the fastest pace since March last year. Gold prices have also but to a lesser extend been suffering from long liquidation after funds in the week to August 29 bought back around 30% of 11 million ounces, they had sold in the previous five weeks.
Do note that this group of traders tends to anticipate, accelerate, and amplify price changes that have been set in motion by fundamentals. Being followers of momentum, this strategy often sees this group of traders buy into strength and sell into weakness, meaning that they are often found holding the biggest long near the peak of a cycle or the biggest short position ahead of a through in the market.
At Saxo, we maintain a patiently bullish view on gold and silver and see the yellow metal eventually reaching a fresh record in the coming months. The timing for a fresh push to the upside, however, will remain very US economic data dependent as we wait for the FOMC to turn its focus from rate hikes to cuts, and during this time, as seen recently, the result is likely to be continued choppy trade action.
Having found trendline resistance at $1947, gold has returned to test the 200-day moving average, currently at $1918 ahead of $1910, the 0.618 Fibonacci correction of the August rally. Overall, the metal is currently stuck in a narrowing range, currently between $1893 and $1942.
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