(Kitco News) – Gold is fulfilling its traditional role amid equity market instability, while the gold:silver ratio has risen to its highest level in six months, and markets are now pricing in 125 basis points of rate cuts by December, according to Rhona O'Connell, Head of Market Analysis at StoneX Bullion.
In a Monday blog post, O'Connell noted that the Fed narrative has shifted dramatically in a very short time, but the overall picture for gold remains positive.
“Roughly a year ago the markets were talking about how the Federal Reserve Board and the Federal Open Market Committee (FOMC) had done too much too late in terms of rate hikes, and there were fears of recession, as well as pressures on small-to-medium-sized industries and the medium-sized banking sector. All of which was supportive for gold,” she wrote.
“Now, after a long period in which the resilience of the US economy has continued to confound any number of economists, not just in the Fed, the talk is of recent US economic numbers in particular that could be pointing towards a recession and there are suggestions that the Fed has sat on its hands for too long, that it may yet make three rate cuts before year-end, or even that there may be a 50 point cut in the offing,” O'Connell said. “All of which is also supportive for gold (unless of course it doesn’t happen).”
Last Fridays’ weaker-than-expected nonfarm payrolls report drove U.S. stocks sharply lower, which in turn sent Asian and European equity markets into a tailspin as they opened up for Monday’s trading session. “The Nikkei was particularly hard hit, partly because it is a deep and liquid market, but partly also in response to the change in the Bank of Japan’s policy and the associated 12% gain in the yen over the dollar in the past four weeks,” she noted.
Gold followed risk assets lower in the short term before prices recovered to pull back above support near $2,400 per ounce. But O’Connell said the yellow metal is still under pressure.
“This is not unusual; more often than not when equity markets turn down sharply gold is sold as a hedge against risk, in order to raise liquidity against potential margin calls,” she said. “Those sellers almost invariably then re-establish their positions when the dust settles.”
“A good case in point is gold’s performance in the meltdown at the onset of COVID; gold fell along with everything else, but unwound its losses in four weeks, while it took the S&P six months to claw its way back,” O'Connell pointed out. “So gold may still stay under some pressure in the near term, but the external forces at work favour higher prices.”
The same cannot be said for silver, however.
“Silver is continuing to suffer from the overflow of weakness in the base metals markets, and the latest economic numbers, which were partly responsible for the equities markets’ falls have continued to undermine silver, which has now unwound all the gains that it made through July,” she wrote.
“We referred last week to the frequent chatter about Chinese overcapacity in the solar market likely undermining sentiment in silver; there is little reason to change that view,” O’Connell added. “Metals Focus analysis for 2023 shows solar demand of 6,017t last year, 20% of global fabrication (excluding investment) demand.”
Looking at fund flows, O’Connell said “gold ETFs were mixed last week, with three days of redemption and a small loss of 3.4t overall, taking the year-to-date losses to 76t for holdings of 3,146t,” with global mine production for the yellow metal at around 3,750 tonnes.
“Silver ETFs were also mixed with three days of creations, adding 150t over the week, for a year-to-date gain of 568t,” she noted. “Global mine production is ~25,800tpa.”
Turning to the futures markets, O’Connell noted that gold’s momentum slowed, while silver futures continued their negative recent trend.
“Gold made small gains in the week to 30th July, adding 0.6% to $2,411 and silver dropping again, losing 2.3% to finish at $28.37,” she said. “Gold outright longs dropped by 6% or 38t to 577t; outright shorts fell by 5% to 103t. Net long down from 507t to 474t. Silver outright longs fell by 11% to 6,092t and shorts contracted by 25%or 103t to 2,128t. Net long down 4% to 3,964t.”
As for the big picture, O’Connell said that in the near term, “gold could well remain under some pressure, but the overall outlook is positive on the back of geopolitics and economic uncertainty, and the evolution of the US political scene will remain supportive as a bull case can be made for both likely Presidential election outcomes.”
“Rising Middle Eastern tensions are also supportive and the fragility of the equities markets are a further positive element although that may take a little time to develop,” she added. “Silver is attuned to the economic outlook and while the gold:silver ratio is overbought it is expected to continue to underperform.”
