Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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Gold dumps on vaccine news and strong U.S. data
Ole Hansen
Head of Commodity Strategy
Summary: In our latest gold update we highlighted the risk to precious metals from an ongoing flow of positive news related to Covid-19 vaccines. Yesterday's slump below support at $1850/oz has continued today thereby raising fresh investor concerns about the metals ability to move higher into a vaccine-led global recovery.
In our latest gold update we highlighted the risk to precious metals from an ongoing flow of positive news related to Covid-19 vaccines. Yesterday it slumped below support at $1850/oz thereby raising fresh investor concerns about the metals ability to move higher into a vaccine-led global recovery.
Earlier in the day the market had been spooked by news that the U.S. is gearing up for a vaccine roll out within weeks, an AstraZeneca vaccine that works better in small doses and can be stored at higher temperatures than those being produced by Pfizer and Moderna. What eventually took it lower was the dollars knee-jerk reaction higher in response to much stronger than expected U.S. PMI data. While the dollar later turned lower, the damage to gold had already been done with the break below support attracting long liquidation and short-selling signals from algos.
Gold trades below key support at $1850/oz with the next level of support being the 200-day moving average just below $1800/oz. A break back above $1850/oz and confirmed by a move above $1900/oz is now needed to end the current consolidation/correction phase.
The weakening sentiment can also be seen through the options market where the cost of a 25% delta Call with a three-month expiry over a similar put has fallen to 1%, the lowest since April 2019. Today sees the expiry of December COMEX gold options and before yesterday’s break below $1850/oz, the open interest on puts and calls from strikes $1850 down to $1800 stood above 35,000 lots (35 million ounces) and the mentioned break is likely to have attracted hedging activity from both camps.
Some additional uncertainty was removed late in the day when Trump without acknowledging defeat – which he never will - finally instructed the General Services Administration to begin the formal transition planning.
Responding to these developments, investors pulled another 345k ounces from Exchange-traded fund investments. Thereby taking the total reduction since November 9, when the first vaccine news hit, to 2 million ounces. The aggregate open interest in COMEX gold futures meanwhile rose, a sign of increased short selling activity.
Is it all over for gold some may now ask. We believe the answer is no but also acknowledge that gold and silver once again do what they do best, i.e. frustrate investors. While the hopefully successful rollout of vaccines next year will support growth and the stock market, we also see tailwinds for investment metals. The dollar is likely to weaken as investors look to emerging markets for better opportunities, not least if bond yields climb thereby strengthening the rotation to value from momentum. Analysts at the big banks predict that the dollar could fall 20% if widely available coronavirus jab leads to an economic rebound in 2021. This according to a recent article in the $FT called “Vaccine arrival expected to trigger dollar slump in 2021”.
With former Fed Chair Janet Yellen likely heading into government as Biden’s pick for Treasury secretary, the doves will fly, both in government and at the Federal Reserve. With this in mind we are likely to see more, not less stimulus over the coming months. Such actions may increase the risk of central banks overcompensating thereby reigniting the reflation trade. On that basis we do not see a major risk of rising real yields with a potential pick-up in nominal yields being driven by rising inflation expectations (breakeven).
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