- Precious metals experienced a strong rally ahead of the US elections, only to drop sharply afterward due to the simultaneous rise in the US dollar (USD) and bond yields, breaking key support levels.
- This correction ended when escalating tensions between the US and Russia increased demand for safe-haven assets such as precious metals, the Japanese yen, the Swiss franc, and short-term government bonds.
- The US debt situation is likely to worsen as the Trump administration ramps up deficit spending on tax cuts, infrastructure, and defense.
- It is notable that the recent decline in speculative positions in the futures market was almost entirely due to the liquidation of long positions rather than the opening of new short positions.
According to a survey conducted among Saxo clients for Q3 2024, 53% of respondents identified geopolitical tensions as a key factor in their investment decisions, up from 43% in the previous survey. Ole Hansen, Head of Commodity Strategy at Saxo, highlights the impact of these factors on recent movements in the precious metals market.
Gold and silver prices continued their rebound early this week. Their gains were initially supported by a weaker dollar and later by worsening US-Russia relations following President Biden’s approval for Ukraine to use long-range missiles against Russia. The situation escalated when the Kremlin declared, “Any aggression against Russia by a non-nuclear state involving a nuclear state will be considered a joint attack.” Shortly after, reports emerged of Ukraine conducting its first ATACMS strike on Russian territory, further driving demand for safe-haven assets like precious metals, the yen, the Swiss franc, and short-term government bonds.
Precious metals, both gold and silver, rallied significantly before the US presidential elections but saw sharp declines afterward as the USD strengthened and bond yields rose, breaking key support levels. The market had been weighed down by hedge funds maintaining elevated long positions in gold for months. Despite this, we remain optimistic about investment metals. The recent $253 drop in gold prices was the largest in over a year, but it should be seen in the context of prior strong gains. This pullback reflects a healthy correction following weeks of intense election-related buying, which had deterred physical buyers from entering the market due to fears of further price hikes.
The US debt situation is poised to deteriorate as the Trump administration increases deficit spending on tax cuts, infrastructure, and defense. Alongside persistent demand from central banks seeking to de-dollarize reserves, tariffs could heighten inflationary pressure, offsetting potential slowdowns in the pace and scope of US rate cuts. In the short term, the most significant challenge—excessive speculative long positions in futures—has been alleviated. However, given the divergent central bank policies supporting the USD, a return to record-high levels seems unlikely unless geopolitical escalation dampens demand for other asset classes, boosting interest in safe havens.
Key Developments Highlighted in Four Charts:
- Gold’s correction coincided with a sharp drop in expected US rate cuts by December next year—from ten cuts (including three already executed) to about three. This significant downward revision had relatively little impact on the market, highlighting other factors supporting gold’s positive outlook.
- The net long position in gold futures on the COMEX was reduced by 40,000 contracts after three weeks of selling, reaching 197,000 contracts—the lowest in three months. However, less than 1,000 contracts of this change resulted from new short positions. In other words, while investors had to reduce long positions due to falling prices, the market’s weakness did not prompt significant new short-selling. Meanwhile, gold-backed ETF holdings also declined due to lowered expectations of further rate cuts, keeping financing costs relatively high.
- The relentless rise of the Bloomberg Dollar Index to its highest level in two years was a major factor in gold and silver’s price correction. Silver suffered more than gold due to weakness in industrial metals markets, driven by tariff-related demand concerns. Still, holding key support levels, coupled with a temporarily weaker dollar, was enough to support a price rebound, further amplified by geopolitical tensions.
- Rising bond yields were also cited as a reason for selling precious metals. However, this weakness stemmed from concerns over an expanding US budget deficit, leading to higher debt burdens during Trump 2.0. The US faces a significant financial challenge, with interest payments on its debt projected to reach $1.16 trillion for the fiscal year—a 30% increase from the previous year. The combination of rising yields and mounting debt could further exacerbate the situation, positioning gold as an attractive asset despite higher yields.
Ole Hansen, Head of Commodity Strategy, Saxo
Source: CEO.com.pl
