Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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With gold reaching new heights, silver shows potential
US Election 2024
Ole Hansen
Head of Commodity Strategy
Key points
- Gold's record breaking rally continues with focus now turning to the FOMC and the size of the first rate cut
- As the opportunity cost of holding gold decreases, we may see increased demand for gold-backed ETFs
- While gold has captured most attention, silver supported by industrial metal strength is once again outperforming
Gold’s record-breaking rally continues, with spot bullion now approaching USD 2,600 per troy ounce, reflecting a year-to-date gain of over 25%. This surge means a standard 400-troy-ounce gold bar (around 12.4 kilograms or 27.4 pounds), commonly traded internationally and used by central banks, now costs over USD 1 million, up from USD 725,000 last October. This increase followed heightened Middle East tensions after Hamas' attack on Israel and growing expectations of a shift in the US interest rate cycle from hikes to cuts, as well as continued central bank demand and speculative buying from hedge funds.
Since then, gold has surged nearly USD 800, with only minor corrections during this extended rally—showing strong underlying momentum, driven by FOMO (fear of missing out), which is rarely sustained for this long. As we’ve highlighted, gold’s rise—despite being a ‘dead’ asset that offers no returns beyond price appreciation minus its funding or opportunity costs relative to short-term bond yields—reflects a world in imbalance. Uncertainties are driving demand from investors, both institutional and individual, as well as central banks.
In our recent update, we noted the contributing factors to gold's rally: fiscal instability, safe-haven appeal, geopolitical tensions, de-dollarization, and anticipated Fed rate cuts. The first of several cuts is expected on 18 September, during the long-awaited FOMC meeting. While the size of the cut (either 25 or 50 basis points) may trigger short-term volatility, the fundamental drivers of gold's rally are unlikely to fade, signaling potential further gains in the coming months. As the opportunity cost of holding gold decreases, we may see increased demand for gold-backed ETFs from asset managers, especially in the West, who up until May had been net sellers since the FOMC began its aggressive rate hikes in 2022.
What are the risks?
It’s important to remember that no asset, including gold, rises in a straight line. Price corrections are inevitable. One key risk is the buildup of speculative long positions. If gold traders anticipate higher prices and the metal falls below key support levels, this could trigger a wave of selling as positions are unwound, further pushing prices down. Additionally, any easing of geopolitical tensions could reduce gold’s appeal as a safe haven, encouraging investors to pursue riskier, higher-yielding assets. Lastly, central banks and investors may hesitate to buy at such elevated levels, fearing overvaluation, which could reduce demand and weigh on prices.
Silver follows gold – but faster
While gold’s new record high has captured most attention, silver has outperformed this month, delivering returns twice as large. Silver’s dual role as both a precious and industrial metal means its price is influenced by gold, industrial metals, and the dollar. After hitting a decade-high of USD 32.50 in May, silver experienced a deep correction alongside industrial metals due to concerns about Chinese demand. Between May and August, the gold-to-silver ratio widened from 73 ounces of silver per ounce of gold to 90 ounces.
However, a continued gold rally and a recovering industrial metals sector, supported by a weaker dollar, have brought the ratio back down to 84, with silver once again outperforming gold. Investors cautious about paying record-high prices for gold may see better value in silver, which remains well below its 2011 record of USD 50. For silver to attract more buyers, a break above the May high is needed. Momentum funds currently hold a relatively small speculative long position in silver, at 27k contracts, just above the five-year average, compared to gold’s much larger 227k net long position, which is double its five-year average.
Recent commodity articles:
9 Sept 2024: COT: Crude long cut to 12-year low; Dollar short more than doubling
5 Sept 2024: Can gold overcome the 'September curse'?
4 Sept 2024: Wheat rises on European crop worries
3 Sept 2024: Chinese economic woes drag down crude oil and copper
2 Sept 2024: COT: Commodities see broad demand as the USD slumps to a net short
30 Aug 2024: Commodities sector eyes fourth weekly gain amid softer dollar and Fed expectations
27 Aug 2024: Month-long sugar slide pauses amid concerns of Brazil's supply
27 Aug 2024: Libya supply disruptions propel crude prices higher
26 Aug 2024: COT: Funds boost metals investment as dollar long positions halve amid weakness
23 Aug 2024: Commodities Weekly: Metal strength counterbalancing energy and grains
22 Aug 2024: Persistent supply contraints keep cocoa prices elevated
21 Aug 2024: Weak demand focus steers crude towards key support
19 Aug 2024: Resilient gold bulls drive price to fresh record above USD 2500
19 Aug 2024: COT Buyers return to crude as gold stays strong; Historic yen buying
16 Aug 2024: Commodities weekly: Gold strong as China weakness drags on other markets
9 Aug 2024: Commodities weekly: Calm returns to markets, including raw materials
8 Aug 2024: Sentiment-driven crude sell-off eases, allowing traders to focus on supply risks
7 Aug 2024: Limited short-selling interest observed during copper's recent aggressive correction
6 Aug 2024: Video: What factors are fueling the current market turmoil and gold's response
5 Aug 2024: COT: Broad commodities sell-off gains momentum; Forex traders seek JPY and CHF
5 Aug 2024: Commodities: Position reduction in focus as volatility spikes
2 Aug 2024: Widespread commodities decline in July, with gold as the notable exception
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