In August, gold rose from levels around $2,400 per ounce at the start of the month to new all-time highs of around $2,531 per ounce. The rally he mirrored the broad decline in US yields that followed worse-than-expected US labor market data for July. This explains Peter Kinsella, Gglobal Head of Forex Strategy at Union Bancaire Privée (UBP)
Precious metals: gold rush continues
For September, “we believe gold will generally see consolidation. The yellow metal has moved significantly in a short period of time and, with markets pricing in a sizeable Fed rate cut cycle, we think a good portion of gold’s gains for the year are already priced in. The broader backdrop is interesting as we are seeing several central banks cutting rates, implying that the fundamental backdrop for gold remains supportive and as a result we do not see significant downside risks for the yellow metal. The recovery in equity markets is also supportive for gold in the short term as it means investors will not be forced to liquidate long gold positions to provide margin to underperforming equity portfolios.”
As for market positioning, “it is still long and has increased modestly in recent weeks. ETFs have seen solid inflows as retail investors have increased their gold allocations, and we think these flows can be sustained in the fourth quarter. On the other hand, in terms of physical purchases by central banks, we have seen a notable reduction, with the monthly rate falling from around 80 tonnes to 40 tonnes. This reduction in purchases is likely a reflection of the strong price rise. We assume that central banks will be strong buyers in the event of a downturn.”
More volatile silver
We have reviewed Our gold forecasts are on the rise – explains the expert – to take into account the broader shift in global monetary policies and to capture the impact of our forecast of a weakening US dollar. Gold tends to move ahead of forecasts of falling real interest rates, while it tends to rise in conjunction with depreciation of the USD. We note that overnight index swaps (OIS) have priced in a substantial decline in the Fed funds rate over the next two years, but this has not yet been significantly reflected in US dollar exchange rates. Our models show that a 1% decline in the US Dollar Index is consistent with a rise in gold prices of around $8 per ounce, meaning gold can rise further in the face of a weakening USD. If the US dollar weakens by between 5% and 10% on a currency-weighted basis over the next year, trade, Gold prices will likely rise by nearly $100 an ounce from current levels.
Looking at silver, in August it moved from lows of around $26.50 to highs of around $30 per ounce. The return to levels near $30 per ounce is a result of the general recovery in risk assets and, as gold also rose, the traditional beta of silver relative to gold came into play. The result of these moves is that the volatility profile of silver has increased. Three-month implied volatilities have risen to levels of around 30%, a high level both in absolute and relative terms.
UBP analysis
We do not expect significant increases in silver in September. Gold looks set to go down a period of consolidation, meaning that excessive upside is unlikely for silver. In our view, it appears to be trading too low relative to historical gold-silver ratios.
Furthermore, “the data manufacturing is worsening, with the latest PMIs from China and the Eurozone surprising to the downside, and it doesn’t look like things are going to get any better in the near term. This set of negative data will prevent silver from moving higher in the near term, certainly not in line with what we would expect given the rally in gold. Overall, we believe silver’s beta relative to gold will offset the negative beta of manufacturing demand; however, this will not be a linear process and we should expect the choppy price movements we have seen in recent months to continue.”
