Head of Commodity Strategy
Summary: Global stock markets surged on Tuesday while bond yields and the dollar slumped after an unexpected slowdown in US inflation once again increased bets that the Federal Reserve’s rate hiking cycle is over. Having just found support near $1930, the news helped send gold higher, but it was the semi-industrious and recently beaten down metals like silver and platinum that benefitted the most from the prospect for lower funding cost.
Key points in this note
Global stock markets surged on Tuesday after an unexpected slowdown in US inflation once again increased bets that the Federal Reserve’s rate hiking cycle is over. Bond yields slumped while the dollar took the biggest one-day hit in a year as the market priced in a full one percent rate cut for next year with the first now priced to occur in June, from July prior to the report. Having just found support near $1930, the news helped send gold higher, but it was the semi-industrious and recently beaten down metals like silver and platinum that benefitted the most from the prospect for lower funding cost.
US October CPI came in below expectations with the Y/Y easing to 3.2% from 3.7%, while the core metrics were also soft, rising 4.0% Y/Y, beneath the prior and expected 4.1%. The softness triggered re-pricing of future rate cuts with the SOFR futures pointing dialing further back on the risk of additional rate hikes, instead pricing in a full 1% cut next year and followed by a through in rates by December 2025 at 3.75%.
We have for some time been arguing the Fed is done hiking rates, but we also acknowledge that central bankers cannot express this view in public as they would risk boosting risk sentiment to the point it loosens financial conditions too soon. A predicament that was on clear display last week when Federal Reserve chair Jerome Powell was forced to dial back the dovish reprising seen following the November 1 FOMC (Federal Open Market Committee) meeting, when Powell strongly hinted that the Fed is done hiking rates.
However, with the FOMC focusing on inflation, rather than the current economic strength yesterday’s CPI print helped reignite the animal spirit among traders, the result being sharply higher equity markets, especially those beaten down sectors that have struggled recently amid elevated levels of debt and an increasing cost of servicing that debt. Examples of themes benefiting were biotech, bubble stocks, and energy storage and renewable energy, the latter two being themes that support demand for metals such as silver and platinum. See the latest update from Peter Garnry, Saxo’s head of equity strategy, titled “Green stocks rally on lower inflation; earnings update”
After rallying by close to 200 dollars last month, gold went through a much-needed period of consolidation, during which time it did not respond (positively) to fresh yield and dollar softness following the mentioned FOMC meeting on November 1 when Powell hinted the Fed was done. With US ten-year bond yields more than 50bps below 5%, now key resistance, the risk to US fiscal policy, and especially whether the recent jump in both real and nominal yields would end up ‘breaking something’, has faded a bit, thereby reducing some of the support which helped propel gold sharply higher last month. Instead, the bullion market should now reestablish its negative correlation to yields and the dollar, however, following last month strong rally it could be argued that that additional dollar and yield weakness will be needed to send prices back above $2000 towards a fresh record high.
Apart from central bank buying, which continues at a record pace, leverage fund accounts, such as hedge funds and CTA’s as well as investor demand for ETFs remain key to underpin a continued rally in gold. We believe the prospect for peak rates, once confirmed, leading to an eventual lowering of the cost of holding non-interest paying precious metal positions, will be the trigger for the next move higher. Until then we keep our patiently bullish view on gold and see setbacks as a buying opportunity.
After last month’s aggressive 200-dollar rally, supported by near record buying from hedge funds and CTA’s, gold reversed lower on profit taking before bouncing after finding support at the 200-day moving average level around $1935. With positive momentum returning as seen through the break above the 21-day moving average, spot gold will likely look at the recent consolidation low around $1980, while a break above would open for a revisit to and above $2000.
As mentioned, the prospect for lower funding cost supporting liquidity intensive industries, some of which needs platinum and silver, has supported a strong rebound in these two beaten down and under owned metals. In addition, the recent weakness relative to gold can also be partly explained by the absence of central bank demand for these metals. Hedge funds in the week to November 7 held a 105k contract (10.5m ounces) net long in COMEX gold futures, more than 20k above the one-year average. Meanwhile in silver funds held a near neutral position of 2.2k contracts, some 10k below the one-year average while a small net short of 1.4k contracts were held in platinum, some 8k below the one-year average.
Continued focus on peak rates will allow these two very interest rate sensitive metals to play catchup with gold. In his latest update Kim Cramer, our technical analyst, provides his view on the current setup here.
2024: The wasted year
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
