Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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US dollar dictates golds short-term direction
Ole Hansen
Head of Commodity Strategy
Summary: Gold remains on the defensive as an overdue correction continues to unfold in response to recent dollar and US Treasury yield strength, brought about by the Federal Reserves need to remain hawkish amid recent economic data strength, not least recent inflation data which is showing loss of downward momentum. Additional dollar strength may send it lower still towards the next area of support around $1788, while a resumption of the positive sentiment as a minimum would require a close above the 21-day moving average, currently at $1883
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Gold is still on the defensive and following a +340-dollar rally since early November the market has now given back around 125 dollars. The trigger which saw the price trade lower after being rejected at $1950 was a recent batch of stronger than expected US economic data highlighting the challenge the US Federal Reserve is facing when trying to force inflation lower towards its long-term target of 2%. Developments that has seen months of dollar weakness being replaced by renewed strength while bond yields have moved higher, both developments, given their inverse correlation, have provided gold with fresh headwinds.
The latest slump which saw bullion prices hit an $1819 low last Friday came after Fed’s Mester and Bullard, both non-voters, responded to recent strength in US CPI and PPI data by called for another 50-bp rate hike. The result being a Fed funds futures market pricing in a higher terminal rate and a longer period before rates eventually begins to turn south. The future direction of inflation remains a key focus for us and the market in general, and whether the Fed’s long-term (low) target can be met. While the prospect of an economic slowdown may support lower price pressures in the short-term, the medium to long-term outlook remains challenged by the current developments on the global stage.
As stated before, we are looking for a price friendly 2023 for investment metals supported by recession and stock market valuation risks, an eventual peak in central bank rates combined with the prospect of a weaker dollar as well as continued strong central bank demand. In addition we still view the medium term outlook for inflation falling to below 2.5% as being somewhat optimistic, compared with our forecast closer to 4%. First, however, we will see several months where inflation will continue to decline before rising wage pressures, Chinas recovery lifting the cost of raw materials will be felt.
Regarding investment flows we have yet to see demand for ETFs recover with total holdings still holding near a two year low near 94 million ounces, having seen no pick up during the mentioned 320 dollar rally. Hedge funds meanwhile have been near constant buyers since early November, and during this time the net long has jumped from a 3.9 million ounce net short to a 9.3 million ounce net long, a nine-month high.
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