Gold pulled back to consolidate, but prices hold up well. The market is waiting for the US Federal Reserve to make its first rate cut

• Profit-taking by funds weighed on prices, but fund short-covering into the dip suggests sentiment is not bearish.
• Traders have chosen to ignore firm treasury yields and a strong dollar as they expect these to turn lower before long...
• ...instead, they have focused on other risks, chiefly the geopolitical situation and the approaching US Presidential election. The latter is likely to make investors increasing nervous, which should boost haven demand.
• After two years of profit-taking, ETF investors turned small net buyers in May and June.

Silver prices fell more than gold prices, but the market still looks well supported

• The gold/silver ratio still suggests silver is undervalued compared with gold, a lower interest rate environment that boosts industrial demand may be enough to see the ratio return to more normal levels.

Palladium prices rebound off lows, strikes and potential mine closures underpin the firmer tone

• Funds still net short palladium and the long/short position is looking increasingly polarised, increasing the risk of a short-covering rally.

Gold has held up better than other metals since it peaked in May"

Gold consolidated in June, but held up well compared to other metals 

It would seem markets are waiting for the US Federal Reserve to make its move on interest rates and while they are doing so, gold has been biding its time, consolidating within a $100 per oz range, between $2,286.80 and $2,387.75 per oz. Gold has held up better than other metals since it peaked in May, with copper for example spending all of June trending lower, with prices ending June, 13.7% lower than its May peak, compared with gold’s 5% pullback.

CHART 1

All signs and indeed expectations are for US interest rates to start being cut soon"

Dollar strong despite likely Fed easing

All signs and indeed expectations are for US interest rates to start being cut soon, with most expecting the first cut to be made in September. Yet, despite this the US dollar has been trending higher again, with the US Dollar Index rising to 106 in June, from 104 in May, and getting close to challenging the April high at 106.50. Normally, dollar strength would weigh on gold prices, as it has done on copper – this suggests gold has relative strength.

Reasons to be bullish have not gone away

While the strong dollar should be a headwind, as indeed elevated US ten-year treasury yields should be, the market may be ignoring these on the understanding they will turn down before too long. This is especially so now that inflation seems to be tamed, US core PCE price index fell to 0.1% in May, from 0.3% in April (revised up from the original reading of 0.2%). If the strength in gold prices has not been broken by the strong dollar and relatively high yields, then it suggests traders may be more worried about other potential developments, including geopolitical risks, equity market valuations and political risks.

10 Jul 2024 | Categories: Gold, US

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