Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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Sluggish US economic indicators boost demand for gold and silver
Ole Hansen
Head of Commodity Strategy
Key points
- Gold and especially silver are showing signs of breaking their recent trading ranges
- Supported by further signs that the US economy is slowing, thereby raising the prospect of the Federal Reserve pivoting towards more than just one rate cut this year
- Further progress will depend on interest rates and the timing of the first US cut, economic conditions and geopolitical factors.
Gold and especially silver are showing signs of breaking their recent trading ranges, supported by further signs that the US economy is slowing, thereby raising the prospect of the Federal Reserve pivoting towards more than just one rate cut this year. Both metals traded higher ahead of the US Independence Day holiday after figures showed the US service sector contracted in June at the fastest pace in four years, due to a sharp pullback in business activity and declining orders. Earlier in the week the ISM manufacturing PMI for June fell to 48.5, for a third consecutive month, indicating a contraction across the manufacturing sector.
This data which extended a recent run of softer-than-expected data prints saw US Treausry yields soften, the Dollar pairing back some of its recent gains while adding further fuel to expectations for a US 25 basis point rate cut as early as September followed by another in December.
For a closer look at the technical outlook for gold, silver, copper as well as the platinum-group metals, please check the latest update from Kim Cramer, our technical analyst expert.
The Citi Economic Surprise Index (CESI) is a measure that gauges the extent to which economic data releases either exceed or fall short of consensus forecasts. A positive reading means that data releases have been stronger than expected while a negative reading points to the opposite. Looking at economic data releases for the US we find the CESI has traded in negative territory for the past two months with recent weak economic data triggering an accelerated decline.
On Friday, the US jobs report for June may indicate a further cooling of the labor market with analysts’ expectations pointing to a slower growth in nonfarm payrolls, and if the data is accompanied by a higher unemployment rate and slowing wage pressure, the market may add further fuel to a gold and silver supportive rate cut. In our Q3-2024 outlook published earlier this week, and which was followed up by this across-market focused podcast, we highlighted the strong gains seen already in gold (14.2% YTD) and silver (28%) as the reason for a potential pause this quarter, as investors and central banks adapt to higher prices. The duration of this pause will however depend on interest rates and the timing of the first US cut, economic conditions and whether they continue to deteriorate together with geopolitical factors.
The increased likelihood of a Trump presidency may increase the risk of unfunded tax cuts, like those implemented during Trump's first term, which may boost consumer spending and business investment, potentially leading to higher demand and upward pressure on prices, potentially strengthened by the risk of increased tariffs on imports and trade wars.
Historically, the beginning of a rate cut cycle has been supportive for gold as it normally is associated with a period of economic weakness while driving down the cost of holding a non-coupon paying gold or silver position. Surging funding costs since the Federal Reserve embarked on its aggressive rate hike cycle in 2022 has seen total holdings in bullion-backed exchange-traded funds slump by almost a quarter to 2526 tons, the lowest level since 2019.
We maintain our positive outlook for investment metals with the below drivers still the focus.
Geopolitical risks related to Russia/Ukraine, the Middle East and not least uncertainty regarding the November US president election.
Strong retail demand in China amid the desire to park money in a sector seen as relatively immune to a struggling economy and property woes and the outside risk of the Yuan devaluing.
Continued central bank demand amid geopolitical uncertainty and de-dollarisation, and not least gold’s ability to offer a level of security and stability that other assets may not provide. We view the PBoC’s buying pause as temporary.
Rising debt-to-GDP ratios among major economies, not least in the US, raising some concerns about the quality of debt. In other words, rising Treasury yields are not necessarily negative for gold as they raise the focus on overall debt levels and the sustainability of those.
In addition, we may see the focus change from the negative impact of lower rate cut expectations towards support from a reaccelerating inflation outlook.
Where gold goes, silver goes, but faster, and with that correlation maintained we stick to our end of year gold forecast at USD 2500 and silver at USD 35.
Recent commodity articles:
4 July 2024: Podcast Special: Quarterly Outlook - Sandcastle Economics
2 July 2024: Quarterly Outlook - Energy and grains in focus as metals pause
1 July 2024: COT: Crude long builds ahead of Q3 while grains selling accelerates
28 June 2024: Metals and natural gas propel commodity sector to quarterly gain
26 June 2024: Crude seeks support from seasonal demand strength
24 June 2024: Copper's resilience despite China weakness
18 June 2024: Precious metals go through prolonger period of consolidation
17 June 2024: COT: Dollar long jumps; Funds start rebuilding crude long
14 June 2024: Commodity weekly: Energy sector gains counterbalance metal consolidation
13 June 2024: Oil prices steady amid divergent OPEC and IEA demand projections
10 June 2024: COT: Brent long cut to ten-year low; metals left exposed to end of week slump
3 June 2024: COT: Crude length added before OPEC+ meeting; gold and copper see profit-taking
31 May 2024: Commodity weekly: Strong month despite late decline in crude and fuel
27 May 2024: COT: Gold and crude see increased demand as dollar longs plummet
24 May 2024: Commodity weekly: agriculture surges, metals fall on fading rate cut hopes
23 May 2024: Podcast: 2024 is heavy metals
22 May 2024: Crude oil struggles near two-month low
17 May 2024: Commodity weekly: Metals lead broad gains
16 May 2024: Gold and silver rally as soft US data fuels market optimism
15 May 2024: Copper soars to record high, platinum breaks out
14 May 2024: COT: Crude long slump; grain purchases surge
8 May 2024: Fund selling exacerbates softening crude outlook
8 May 2024: Grains see bumpy start to 2024 crop year
6 May 2024: COT: Commodities correction spurs muted selling response
3 May 2024: Commodity weekly: Grains boost, correction in softs and energy
2 May 2024: Copper's momentum-fueled rally halts amid weakening fundamentals
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