- Gold and silver struggle to gain momentum
- Since Trump's election a year ago, gold has settled into a range around $1,250/oz
- Gold price nearly unchanged year-on-year, silver down 7%
- Gold and silver's situation contrasts with strength in industrial metals
- Gold-supportive USD weakness offset by higher real yields and Fed funds rate
- A break back above $1,290/oz would clear path towards October high at $1,306
- We keep our year-end call at $1,325/oz
Gold will continue to take its cue from developments across other markets,
not least the US dollar and interest rates. Image: Shutterstock
By Ole Hansen
Gold and – to a certain extent – silver both continue to struggle to gain any momentum, either up or down. This week marked the one-year anniversary of Donald Trump's election to the White House. Since then gold has increasingly settled into a range, pivoting around $1,250/oz, with lower highs and higher lows telling a story of a metal in need of a spark.
A quick look at price developments since November 8 last year shows that gold trades close to unchanged year-on-year, while silver has lost 7%. This relative weakness has occurred despite the strong surge among other industrial metals, not least copper which has gained more than one quarter during that time.
Platinum and palladium remain a story of diverging fortunes, with a rising demand-and-supply deficit for palladium and the opposite for platinum. This development began after the automakers' diesel scandal in 2015, and with palladium being the preferred metal used in gasoline engines, it recently returned to trade at a premium over platinum for the first time in 16 years. Palladium has benefited from the switch to gasoline engines and raised expectations for growth in gasoline-fuelled hybrid electric vehicles.
Key drivers for gold, such as the value of the US dollar, real interest rates and the Fed funds rate, have propelled gold in opposite directions during the past year. Gold-supportive dollar weakness has been offset by the rise in real yields and the Fed funds rate.
Initial gold weakness after the November 2016 election was driven by euphoria surrounding the economic and fiscal impact of promised infrastructure spending and tax reforms. As 2017 arrived and Trump's popularity and ability to pass growth-friendly policies faded, attention swung to geopolitical risks. This occurred not least because of the renewed threat from North Korea, which was not helped by "two confrontational, nationalistic and militaristic leaders playing chicken with each other" (as Ray Dalio at Bridgewater put it).
Gold price (XAUUSD) settles into a range
Source: Saxo Bank
The price gyrations have created a difficult environment for traders, including hedge funds as they got caught out on several occasions. Not least after the election when a near record long had to be reduced and then again at the beginning of the year when gold rallied strongly on a combination of reduced rate hike expectations and geopolitical concerns.
After seven weeks of selling, funds held a long of 167,000 lots in the week that ended October 31, down by just 10,000 lots during the past year. Investment demand for exchange-traded products backed by bullion has been even steadier, with total holdings down by only 2%.
The World Gold Council said in its latest Gold Demand Trends
that gold demand slid to an eight-year low year-on-year in the third quarter of this year. Lower jewellery demand was due to weakness in India after a new tax regime deterred consumers. Inflows into gold-backed exchange-traded funds stalled in response to rampaging stock markets. Positive news were provided by Chinese investors as they bought gold bars and coins on price dips.
Looking ahead, gold will continue to take its cue from developments across other markets, not least the dollar and interest rates. Geopolitical risks related to North Korea have faded during Trump's current four-nation visit to Asia, while at home the Republicans' proposed tax reform may struggle to garner the majorities needed, not least in the Senate.
The latest news on the tax reform potentially struggling has seen gold move higher since yesterday, but for now the move has been lacklustre to say the least, and it highlights gold's current predicament. Underlying demand from investors seeking protection has so far been sufficient to dampen the negative impact of fund selling, but, with no clear direction at this stage, traders should probably adapt a relative short investment horizon.
Nevertheless, having survived the latest selloff without making a lower low, gold is likely to attract some attention with a break back above $1,290/oz clearing a path back towards the October high at $1,306/oz.
We maintain our year-end call at $1,325/oz.
— Edited by John Acher
Ole Hansen is head of commodity strategy at Saxo Bank