Article / 15 March 2018 at 2:02 GMT

Precious metals offer opportunity as FOMC draws near — #SaxoStrats

Global Macro Strategist / Saxo Bank Group - Singapore Hub
Singapore
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  • Shorting gold and silver into the FOMC hikes has been profitable so far
  • Currently the market is net-long on gold and net-short on silver
  • Gold has bounced back up and moved to new highs after Fed hikes
  • Watch for a flight to safety into gold and US Treasuries if trade war risks resurface

By Kay Van-Petersen

We are shorting gold into next week's Federal Open Market Committee meeting; we are also taking an in-depth view on how precious metals have played out so far in this hiking cycle.

Tactical overview

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  • The average return on the gold has been -2.44%, with the range being -0.66% to -4.16%
  • While the average return on the silver has been -4.39%, with the range being -3.35% to -5.75%.
  • It is worth bearing in mind for quite a few of these meetings the positioning on gold and silver were at extreme net-long levels.
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  • Currently the market is net-long gold and net-short silver; on a five year average positioning basis, gold is well above the average, whilst silver is below the average.
  • As we approach hike number six on March 21, it's worth noting that gold is holding up well given a combination of US yields pulling back, US dollar weakness and further turbulence around team Trump with the recent firing of Secretary of State Rex Tillerson.
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"Rexit" impact ... The firing of Secretary of State Rex Tillerson is a sign of White House turmoil that could lend support to safe haven investments such as gold. Photo: Shutterstock


  • Tactical trade views with short gold exposure either outright or through buying puts/put spreads on gold, look compelling, with the Fed being the key trigger next week. Based on the current gold price of $1328/oz, the implied target range for shorts is from $1275/oz to $1316/oz.
  • It's worth noting that gold has done a good job of bouncing back up and moving to new highs after the Fed hike, which could imply a tactical negative bias going into the Fed meeting, which flips over to a positive bias after the meeting.

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Key risks

  • US yields contracting seem to be currently supportive of gold.
  • A weaker US dollar tends to help the precious metals space, as well as commodities in general.
  • General risk-off between today and the countdown to the Fed could see a flight to safety into gold and US Treasuries – especially if trade war risks resurface.
  • A dovish FOMC chair Jerome Powell at next week’s Fed meeting could see a selloff in the US dollar, rates pullback & gold/silver shoot up.
  • Silver’s net-short positioning could make it a candidate for a squeeze.

    

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– Edited by Robert Ryan

Kay Van Petersen is Global Macro Strategist at Saxo Bank. You can follow him on Twitter: @SaxoStrats or @KVP_Macro.

1y
Kay Van-Petersen Kay Van-Petersen
KAY VAN-PETERSEN
08:10:38 .
Gooooooooooooood Morning to the Asia Pacific & Happy Macro Weds, a good evening/night to the Americas, MEA & Europe
08:14:05 So start off this morning with some adjustments to the MM Book.

Adjusting our gold shorts

A. The 1.5% risk that was short from 1329, we take off half here & move the PT to 1306 (1301) & move the stop to 1320 (1350)

B. The 1.0% risk that was short from 1325
=>We initially took off 1/3 at 1316

=>We adjust the balance with a stop at 1320 & PT at 1302
08:25:41 (*Here being $1310, low o/n was 1307.23)

Dovish Fed & Potential Near-Term Prices

Gold +$15-25 from these c. $1310

US10s -10bp, from these c. 2.90%

JPY -50pips to 1fig... taking us back to recent 105.60 lows from these 106.48

EUR +50-75pip taking us above 1.2300 from these 1.2253 lvls...

Would also be risk-on for equities & vol would come down...
1y
Kay Van-Petersen Kay Van-Petersen
Gold has been holding up very well on the last few trading sessions, very well despite yields creeping higher (+10bp on US 5s & 10s), a stronger USD (weaker EUR & JPY)... there is a segment of the mkt that wants to lift the shiny metal

It feels like we could see an easy $15-25 pop on a dovish/neutral Fed...

So in essence this is akin to take half the risk off the table, & moving our stops to below our entry points..

Its played out well just not as well as expected (i.e. the avg. implied target historically would have seen a pullback to $1295)...

The low so far into this FOMC was o/n at 1307.23 (bloomie, spot gold)

Technically, 1306 is 100D with the YTD low being 1302.59....

***

If we get a dovish/neutral interpretation from Powell in under 24hrs, we may look for a tactical long on Gold...
1y
Kay Van-Petersen Kay Van-Petersen
The pathway of spot gold since Fri 9 Mar 2018

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