Gold is settling after its brief burst of life; Silver has a speculative overhang

Gold is consolidating, but it took as positive news the Fed's presumed pivot to no further interest rate increases and possible interest rate reductions. The Fed's interest rate projections, the so-called 'dot plot,' displaying the interest rate projections of individual Federal Open Market Committee (FOMC) members, are now much more closely grouped than they were in September. The technical position looks mixed, but that reflects the hefty drop from a fortnight ago. Any change in the Big Figure around two thousand is bound to attract attention and technical support for gold stands between $1,975 and $2,002 per ounce. Silver's speculative overhang position has been reduced.

Gold: 10-day moving average is below the twenty-day, but this stems from the significant price fall on 4th December

Source: Bloomberg, StoneX

Financial markets interpreted the outcome of the FOMC's meeting to mean that interest rates might decline sooner and faster than is likely to be the case. Once the Statement came out and Chair Powell's Press Conference got underway, bond yields dropped sharply, and gold rose from $1,982 per ounce to close the US session at $2,025 and then tested $2,050 the following day for a cumulative 3.4% gain. 

Silver rose by 7.6%, in keeping with the relationship between the two metals, rising from $22.50 per ounce to $24.50, but it has since given back roughly a quarter of that gain and is trading just below $24 today, below which there is reasonable price support. Silver's recent activity indeed suggests that, for now at least, it prefers to follow gold rather than responding to a slowing US economy, struggles in Europe, and the anaemic recovery in China (bearing in mind that circa 60% of Silver's fabrication demand is driven by industrial uses). Note that the outlook for the solar industry, in particular, is solid and benefits Silver, as does the electrification of the vehicle fleet, underpinning Silver's long-term fundamentals.

After the September FOMC meeting, the dot plot showed a wide variation in FOMC member's views for the Fed Funds target rate by the end-2024. At the December meeting, the grouping was much tighter: the weighted average target rate, at 4.36%, was 34 basis points lower than in September and 97 basis points below the current rate of 5.33%.

FOMC fed funds rate projections (the 'dot plots'): December versus September 2023

Source: The Federal Reserve

Arguably, the FOMC is pricing in four rate cuts next year, but if we look at the distribution of the dots, the majority of the members are looking at either two or three. In his press conference after the meeting, Chairman Powell said that the insertion of the word "any" before "additional firming" is an acknowledgment that they are "at or near" the interest rate peak rate for this cycle. The next question is when it would be appropriate to start 'dialling back'; easing job growth and moderating inflation are all heading in the right direction, but 'we still have a way to go. 

Last Friday, the Presidents of the Atlanta and New York Feds made different speeches from the Chicago Fed President, demonstrating the difference of opinion within the Committee:

• The Atlanta Fed President said he sees just two cuts next year, starting in Q3.
• The New York Fed President said it is "premature" to discuss a March.
• The Chicago Fed President said the risks are becoming more balanced, implying that the Fed might need to cut interest rates to shift its focus towards the 'full employment' versus 'low inflation' element of its dual mandate.

The gold price spent last week swinging between $2,030 and $2,040 per ounce before profit-taking took the heat out of the market and prompted a fall towards $2,020, where it traded today. Bond markets were mixed: following the sharp falls in the immediate wake of the FOMC meeting, the two-year bond yield rallied and is holding above 4.4%, but the ten-year yield continues to drift marginally lower. The gold price shows a slightly closer relationship with movements in the ten-year bond, with a correlation statistic of minus 0.52 versus minus 0.46.

US economic data continues to suggest that the economy is slowing. On Friday, industrial production for October was revised downwards to recovery minus 0.9% month-on-month against minus 0.6% previously estimated, while the November number was +0.2%, missing the markets' call of +0.3%.

Gold silver and the ratio; Silver's correlation with gold and with copper

Source: Bloomberg, StoneX

On balance, the gold price is showing resilience, but arguably, it is discounting the shift in the Fed's stance, and further upside may need additional external impetus. The physical gold market is quiet as various price-elastic regions in the Middle East and South and Southeast Asia absorb the impact of higher prices. The Chinese New Year starts on 10th February 2024, but it will be the Year of the Dragon, traditionally associated with growth, progress, and abundance. The Chinese economy is still sluggish by their standards, but from the point of view of the potential for gold purchases, the approach of this particular year may see a substantial uptick in local buying.

Gold and the two-year and ten-year yields

Source: Bloomberg, StoneX

Exchange Traded Products

In the ETP sector, the first two weeks of December have seen more days of net buying rather than selling, although it was marginal, at six out of eleven. The net changes thus far are still in the negative column, at minus four tonnes. The World Gold Council tracks over 100 such funds with current holdings at 3,232 tonnes as of 18th December, meaning a 7% year-to-date drop of 239 tonnes.

Silver ETPs have seen just three days of net creations in the month to date, but one of those was a big day (up 239 tonnes), meaning that month-to-date, there has been a gain of 84 tonnes to 21,914 tonnes (world mine production is approximately 26,500 tonnes).

Gold spot price vs ETF holdings

Source: Bloomberg, StoneX

Futures markets

In the week to 12th December, managed money positions in gold saw profit taking and some fresh shorts, with longs shedding 6% or 32 tonnes to 465 tonnes; shorts gained 7%, or 11 tonnes to 168 tonnes, leaving the net position at 297 tonnes.

Last week, we highlighted a speculative overhang in the COMEX silver Managed Money positions. This was partially worked off in the week to 12th December, with longs coming down by 24% from 7,049 tonnes to 5,381 tonnes, compared to a twelve-month average of 6,175 tonnes. Short rose 11% from 3,588 tonnes to 3,987 tonnes, a small net change from a short of 4,383 tonnes to 4,377 tonnes.

Gold COMEX positioning, Money Managers (tonnes)

Source: CFTC, StoneX.

COMEX Managed Money Silver Positioning (tonnes)

Source: CFTC, StoneX.

Taken from analysis by Rhona O’Connell, Head of Commodity Market Analysis for EMEA & Asia, StoneX Financial Ltd.

Contact: Rhona.Oconnell@stonex.com.