Diverse DigestKey Points:
- Gold and silver received a fresh boost after softer US CPI and retail sales brought relief
- Silver reached an 11-year closing high on Wednesday, just ahead of key resistance in the USD 30 area
- Focus on central banks and whether their political motivation to buy bullion lifts their willingness to pay record prices
Ole Hansen, Head of Commodities Strategy at Saxo Bank
Gold and silver received a fresh boost on Wednesday as a softer US April CPI brought relief after three consecutive months of upside surprises that helped reduce US interest rate cut expectations. Furthermore, the US economy is showing signs of a slowdown, with weaker data, including lower GDP growth, contractionary PMIs, and subdued consumer confidence leading to softer retail sales, all supporting a relatively dovish stance from the Federal Reserve.
While gold trades near a one-month high, the main action was silver, reaching an 11-year closing high on Wednesday, and platinum, which has broken higher after a year of sideways action. Both are supported by surging industrial metals, not least copper, which has been squeezed higher after hedge funds and physical traders got caught holding short positions in the COMEX futures market. The combination of sticky inflation, note the so-called super core metric remains stuck near 5% while the 6-month annualised core CPI is at 4%, and economic data softness will likely continue to support precious metals demand.
Once the rate cut cycle begins later this year, gold will likely see renewed demand from ETF investors, many of whom have been net sellers since 2022, when the interest rate cycle started. This process helped lift the cost of holding non-interest-paying gold relative to US T-bills, which currently offer a 12-month return above 5%.
We maintain our positive outlook for investment metals with the below drivers still the focus:
- Geopolitical risks related to Russia/Ukraine and the Middle East still play a supporting role
- Strong retail demand in China amid the desire to park money in a sector seen as relatively immune to a struggling economy, property woes, and the outside risk of the Yuan devaluing.
- Continued central bank demand amid geopolitical uncertainty and de-dollarisation, and not least, gold’s ability to offer a level of security and stability that other assets may not provide.
- Rising debt-to-GDP ratios among major economies, not least in the US, raise some concerns about the quality of debt. In other words, rising Treasury yields are not necessarily negative for gold as they raise the focus on overall debt levels and their sustainability.
- In addition, the focus is changing from the negative impact of lower rate cut expectations towards support from a reaccelerating inflation outlook.
Gold has held above technical levels throughout the latest and, once again, shallow consolidation phase, which otherwise could have triggered long liquidation from managed money accounts. It is currently holding an elevated speculative long position in the futures market.
While the buy-on-dip interest will support the gold market, the question is whether the current momentum is strong enough to force prices higher to a fresh record. We believe some patience is called for, not least considering the investors may need more time to adjust and adapt to current high price levels. This includes central banks, major buyers since 2022 and whether their political motivation to buy bullion lifts their willingness to pay record prices. In addition, it is also worth keeping an eye on silver, which potentially could create a fresh tailwind on a break above the USD 30 area.
Silver has, just like gold, gone through a month-long period of consolidation before a surging industrial metal sector supported the latest bounce back towards an absolutely key area of resistance between USD 29.85 and USD 30.00. Having already recorded the highest close in 11 years, a break could potentially set in motion an additional reaction from momentum following funds, currently holding a relatively small net long futures position. The gold-silver ratio, which measures the relative strength between the two metals, trades below 81 ounces of silver to one ounce of gold, down from a January peak above 92, yet still above support at 78.50 and not least 76.
Diverse Digest
