Gold’s aggressive rally being challenged
Published: 04:04 PM,Apr 28,2024 | EDITED : 08:04 PM,Apr 28,2024
Gold's aggressive rally since the mid-February low has been challenged, with bullion suffering a long overdue and relatively aggressive but healthy correction.
The commodity sector trades higher for a fifth week, with the Bloomberg Commodity Total Return index heading for its highest weekly close in seven months. While precious metals and soft commodities paused following weeks of solid gains, the grain sector took over, led by wheat, as it headed for its best week since last June amid adverse weather conditions in key growing regions across the Northern Hemisphere.
In metals, gold suffered a long overdue but so far modest setback, with momentum traders instead switching their attention to copper, which reached a fresh cycle high. This week was dominated by BBHP's attempted takeover of Anglo American to get their hands on the smaller rival's stable of copper assets in South America, a move highlighting the importance of copper in the coming years as the electrification of the world gathers momentum.
Gold's aggressive rally since the mid-February low has been challenged, with bullion suffering a long overdue and relatively aggressive but healthy correction. This correction will help determine the actual level of underlying demand besides momentum and managed money accounts, which generally trade with a short-term focus. It will also reduce longs should the technical and/or fundamental picture change.
Having rallied by almost USD 450 from the mid-February low, the correction currently unfolding has yet to be strong enough to challenge the traders' overall belief in higher prices. From a technical standpoint, the critical area of support using Fibonacci retracement levels can be found in the USD 2,255-60 area, where we find 61.8% of the March to April extension and 38.2% of the whole move from the mid-February low. Holding above this level will signal the market that the retracement is a weak correction within a strong uptrend.
We maintain our positive outlook for investment metals with the below drivers still the focus once the correction dust settles:
• Geopolitical risks related to an increasingly fragmented world with particular focus on Russia/Ukraine and the Middle East
• Strong retail demand in China reflects the desire to park money in a sector seen as relatively immune to a struggling economy, deepening property woes, and the risk of the Yuan devaluation.
• Continued central bank demand amid geopolitical uncertainty and de-dollarisation and the ability to offer 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.
Just like gold, silver also went through a relatively aggressive correction, with the selling being amplified by its recent failure to break above USD 30 per ounce, the 2020 and 2021 high. Having outperformed gold during the recent run-up, silver initially dropped faster than gold before the continued rally in copper helped cushion the slide, leading to support being found in the USD 27 area. The gold-silver ratio which at one point hit 86 ounces of silver to one ounce of gold, from an 81.3 low last month, has since drifted lower to the current 85, still well above its long-term average around 79.
Copper and copper mining stocks continue to push higher with the futures prices in New York and London reaching levels last traded in April 2022. For the past two years, Dr Copper, aka the King of Green Metals, has traded mostly sideways, navigating relatively unscathed through rough seas created by sharply higher funding costs as central banks around the world hiked interest rates to combat inflation, and not least a slowdown in China, the world stop consumer of copper.
During the past couple of months, the metal has steadily climbed, buoyed by global growth and demand optimism, and material downgrades to 2024 mine supply increasingly tightening market conditions. Several mining companies have announced production downgrades due to factors like increased input costs, declining ore grades, rising regulatory expenses, and weather-related disruptions.
Furthermore, the ongoing green transformation and increased use of AI applications are augmenting demand from traditional sectors like housing and construction, and together with the green transformation, we maintain our long-standing bullish stance on copper and copper miners. However, while we have and continue to highlight a supportive medium to long-term outlook for copper demand leading to higher prices, there are some concerns traders have jumped the gun at a time where underlying fundamentals are not yet strong enough to support a rally towards to March 2022 record, a level we see being reached, but potentially not until later this year.
In metals, gold suffered a long overdue but so far modest setback, with momentum traders instead switching their attention to copper, which reached a fresh cycle high. This week was dominated by BBHP's attempted takeover of Anglo American to get their hands on the smaller rival's stable of copper assets in South America, a move highlighting the importance of copper in the coming years as the electrification of the world gathers momentum.
Gold's aggressive rally since the mid-February low has been challenged, with bullion suffering a long overdue and relatively aggressive but healthy correction. This correction will help determine the actual level of underlying demand besides momentum and managed money accounts, which generally trade with a short-term focus. It will also reduce longs should the technical and/or fundamental picture change.
Having rallied by almost USD 450 from the mid-February low, the correction currently unfolding has yet to be strong enough to challenge the traders' overall belief in higher prices. From a technical standpoint, the critical area of support using Fibonacci retracement levels can be found in the USD 2,255-60 area, where we find 61.8% of the March to April extension and 38.2% of the whole move from the mid-February low. Holding above this level will signal the market that the retracement is a weak correction within a strong uptrend.
We maintain our positive outlook for investment metals with the below drivers still the focus once the correction dust settles:
• Geopolitical risks related to an increasingly fragmented world with particular focus on Russia/Ukraine and the Middle East
• Strong retail demand in China reflects the desire to park money in a sector seen as relatively immune to a struggling economy, deepening property woes, and the risk of the Yuan devaluation.
• Continued central bank demand amid geopolitical uncertainty and de-dollarisation and the ability to offer 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.
Just like gold, silver also went through a relatively aggressive correction, with the selling being amplified by its recent failure to break above USD 30 per ounce, the 2020 and 2021 high. Having outperformed gold during the recent run-up, silver initially dropped faster than gold before the continued rally in copper helped cushion the slide, leading to support being found in the USD 27 area. The gold-silver ratio which at one point hit 86 ounces of silver to one ounce of gold, from an 81.3 low last month, has since drifted lower to the current 85, still well above its long-term average around 79.
Copper and copper mining stocks continue to push higher with the futures prices in New York and London reaching levels last traded in April 2022. For the past two years, Dr Copper, aka the King of Green Metals, has traded mostly sideways, navigating relatively unscathed through rough seas created by sharply higher funding costs as central banks around the world hiked interest rates to combat inflation, and not least a slowdown in China, the world stop consumer of copper.
During the past couple of months, the metal has steadily climbed, buoyed by global growth and demand optimism, and material downgrades to 2024 mine supply increasingly tightening market conditions. Several mining companies have announced production downgrades due to factors like increased input costs, declining ore grades, rising regulatory expenses, and weather-related disruptions.
Furthermore, the ongoing green transformation and increased use of AI applications are augmenting demand from traditional sectors like housing and construction, and together with the green transformation, we maintain our long-standing bullish stance on copper and copper miners. However, while we have and continue to highlight a supportive medium to long-term outlook for copper demand leading to higher prices, there are some concerns traders have jumped the gun at a time where underlying fundamentals are not yet strong enough to support a rally towards to March 2022 record, a level we see being reached, but potentially not until later this year.