Precious metals offer opportunity as FOMC draws near — #SaxoStrats
- 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.
- Shorting gold and silver into the previous five Federal Open Market Committee hikes has been a profitable strategy so far.
- 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.
- 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.
"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.
- 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.