Precious metals remain a solid buy for investors

Gold and silver rally as soft US data fuels market optimism

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Published: Mon 20 May 2024, 6:00 AM

Last updated: Tue 21 May 2024, 3:58 PM

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, experts say.

“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 per cent,” a recent commodities report from Saxo Bank said.

While gold trades near a one-month high, the main action was silver, reaching an 11-year closing high last week, 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 per cent while the 6-month annualised core CPI is at 4 per cent, and economic data softness will likely continue to support precious metals demand,” Ole Hansen, Head of Commodities Strategy, Saxo Bank, said in the report.

Saxo maintains its positive outlook for investment metals with the following 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 $30 area,” Hansen said.

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 $29.85 and $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,” Hansen said.