Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
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Head of Fixed Income Strategy
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Yield tumble supports fresh demand for gold and silver
Ole Hansen
Head of Commodity Strategy
Summary: Gold and silver trades higher for a second day as the fallout from Friday’s collapse of Silicon Valley Bank continues to reverberate around the market. Despite the US authorities stepping in with liquidity measures and a new lending program in order to reduce the risk of contagion, the across-market action so far this Monday highlights the elevated unease with bank-led equity market weakness continuing while safe-haven bonds and precious metals remain bid.
Today's Saxo Market Call podcast
Global Market Quick Take: Europe
Gold and silver trades higher for a second day as the fallout from Friday’s collapse of Silicon Valley Bank continues to reverberate around the market. Despite the US authorities stepping in with liquidity measures and a new lending program in order to reduce the risk of contagion, the across-market action so far this Monday highlights the elevated unease with bank-led equity market weakness continuing while safe-haven bonds and precious metals remain bid.
Last Wednesday both gold and silver were looking for support after Federal Reserve Chair Powell stepped up his attack on sticky inflation. During his semi-annual two-day visit to Capitol Hill, he told lawmakers that he was prepared to increase the pace of rate hikes to a higher-than-expected level should incoming data continue to show strength. The market responded accordingly by pricing in close to four additional 25 basis point rate hikes before yearend while the yield on US 2-year Notes jumped above 5%.
Fast forward to today and gold and silver trade up more than 4% and 5% respectively while the mentioned 2-year yield has slumped to around 4.2%. In addition, the market has gone from pricing four rate hikes to less than one, and with the first cut seen before end of year. Adding to this a softer dollar and precious metals have received the support needed to force a change in focus and sentiment.
Furthermore, the sudden change in direction has left many speculative accounts or hedge funds scrambling to rebuild expose having made deep cuts in response to the early February sell off. According to still delayed data from the US CFTC, speculators in the week to February 21 held a 52.5k lots net long in gold, down 53% in just three weeks while the net long in silver was close to neutral after speculators cut length by 82% to 5.6k contracts.
Having witnessed many periods of market unease since the Black Monday crash in 1987 when as a (very) young trainee at a bank in Luxembourg I watched all the volatility on my tiny Reuters screen, there is a very high risk of this present crisis will take more than one action to solve. We are now witnessing the negative impact of the combination of accounting rules, allowing banks to own securities as “Held to maturity” (HTM) during a time where unrealized losses have accelerated on a combination of rising inflation and central banks raising interest rates to fight it.
The cost of an held to maturity investment is not adjusted to fair value during the holding period; there is no point in doing so, since (as the name implies) the holder intends to retain ownership until the maturity date of the investment, at which point the face value of the investment will be redeemed
Gold is currently testing $1900 a key level of resistance and a break above, from a technical perspective, would signal an end to the February correction and with that additional demand from momentum traders looking for a fresh upside attempt, initially towards the January high around $1950.
Silver meanwhile trades up more than 4%, thereby supporting a correction in the gold-silver ratio to 88.50 (ounces of silver to one ounce of gold) from last week’s six-month high near 92. From a relative perspective, silver has become increasingly cheap during February’s brutal 17% top to bottom correction and given the mentioned reduction in the hedge fund long, a change in sentiment like we are seeing with the current slump in yields, has triggered a strong response with the first level of resistance at $21.7 followed by $22 and $22.27.
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