Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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Can gold mount charge on $2,000+
Ole Hansen
Head of Commodity Strategy
Summary: This update was written Thursday before Russia’s overnight attack on Ukraine help drive another upside extension in gold and silver. So the answer to the question is yes, gold can as we projected in our 2022 outlook, mount a challenge at $2000 and beyond. While risk premiums come and go, the latest developments have in our opinion increased the prospect for higher gold and silver prices with rising inflation bringing down growth and with that central banks ability to proceed with the priced in expectations for future rate hikes.
This update was written Thursday before Russia’s overnight attack on Ukraine help drive another upside extension in gold and silver. The text has been left unchanged while the charts and comments at the bottom has been updated. The rally was supported by a drop in US bond yields as investors took shelter from the carnage unfolding in the stock market. Gold priced in euros meanwhile trades near the 2020 high with safe-haven demand more than offsetting the negative impact of a stronger dollar. Gold and silver are likely to remain in demand with bonds struggling to provide the usual safe haven as this conflict comes with even higher inflation as a product. In addition, central banks must balance rate hikes against an accelerated economic slowdown, and any lowering of the current 7 rate hike expectations will further support the metals.
In other words, the Russia Ukraine crisis has turbocharged our belief in higher precious metal prices, not only due to a potential short term safe haven bid, but more importantly due to what this tension will mean for inflation (UP), growth (Down) and central banks rate hike expectations (Fewer).
Gold’s three-week uninterrupted rally has paused after reaching key resistance and following a slight lowering of the geopolitical temperature. In addition, a 130-dollar rally from the January low and a significant outperformance relative to other asset classes, has also created the need for consolidation while pondering the next move.
Prior to the latest run up in prices that was driven by geopolitical tensions over Ukraine and momentum buying from traders focusing on technical breakouts, gold had for several weeks managed to defy gravity amid rising US real yields. Several attempts below $1800 quickly found buyers with physical demand from Asian buyers and central banks providing a bid strong enough to quell selling attempts by traders and algorithmic trading systems focusing on surging real yields.
Gold traders have instead increasingly been focusing on hedging their portfolios against the risk of slowing growth and with that falling stock market valuations as well as increased turbulence in the bond market. Even more aggressive rate hikes may end up being positive for gold as it will further raise the risk of a policy mistake from the Federal Reserve.
Asset managers and hedge funds have responded to these gold-supportive developments by showing renewed interest and following a 9.2-million-ounce reduction last year, total holdings in bullion-backed gold ETFs have started to climb with 2.2 million ounces added so far this year. Leveraged money managers or hedge funds often focus more on momentum than fundamentals and following the recent rejection below $1800 and subsequent technical breakout above $1855, they have shown rising interest with the total net long in COMEX gold futures jumping to a three-month high at 12.6 million ounces, still well below the November peak at 16.4 million, let alone the 2019 record at 29.2 million.
Besides the current geopolitical risk premium which potentially amounts to somewhere around 20 dollars, we maintain our bullish outlook in the belief inflation will remain elevated with rising input costs, wages and rentals being a few components that may not be lowered by rising interest rates. We believe gold is also increasingly being viewed as a hedge against the markets current optimistic view that central banks will be successful in bringing down inflation before slowing growth forces a rethink of the pace of rate hikes and the resulting terminal rate.
Having broken above resistance-turned-support at $1923, the 61.8% retracement of the August-2020 to March 2021 sell off, gold’s advance has paused after running into some profit taking above $1965. However, for now, an RSI close to 80 describes a market in need of consolidation before potentially mounting a challenge at the psychological important $2,000 level.
Silver meanwhile has extended its recent strong run of gains and after pushing above the 200-day moving average yesterday, now support at $24.20, the price has extended above the November high at $24.70 with some resistance now looming at $25.75, the 50% retracement of the 2021 top to bottom sell off. Against gold, the ratio has dropped to a one-month low 77.5 signalling renewed attempt of outperforming, thereby making up for some of the ground that was lost towards the end of last year.
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