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Article / 16 September 2016 at 13:30 GMT

Precious metals on defensive ahead of busy central bank week

Head of Commodity Strategy / Saxo Bank
  • There is only a 20% chance that the Fed will hike rates next week 
  • But markets still worry that Janet Yellen and her FOMC members may act
  • Despite a sharp correction, silver is still up by 38% for the year-to-date
  • Gold is up 25% for the same period, which explains why bulls like silver
By Ole Hansen

Precious metals have been back on the defensive this past week with the shake-out in both bonds and stocks hurting the general level of the appetite for risk in the market. Next week's central bank meetings from the Federal Reserve and Bank of Japan should provide the market with some additional guidance and direction.

The US yield curve has steepened to its widest in 10 weeks on a combination of rising rate expectations and a general risk reduction driven by the latest spike in volatility. This has driven US 10-year real yields back up to a pre-Brexit high of 0.20%.

 Heating up ... gold has made strong gains this year, and traders in the precious metal are looking to the Fed for direction. Photo: iStock

The negative impact of rising bond yields have prevented gold from reacting to the tailwind from a weaker dollar.

Gold and the US dollar and bonds

Gold drivers

Source: Bloomberg, Saxo Bank. Create your own charts with SaxoTrader; click here to learn more. 

This development can best be seen through gold priced in euros.

The combination of gold trading lower and the dollar trading weaker against the euro has taken XAUEUR back down towards key support at €1,170/oz. A break below could signal an extension lower towards €1,153/oz, which could add some additional pressure to XAUUSD currently trading relatively quietly.

Gold priced in euros under pressure from its inability to find support from a weaker dollar

Source: Saxo Bank

While the risk of a rate hike next week from the Federal Open Market Committee stands at just 20%, the market has maintained a lingering worry that Janet Yellen and her fellow members of the FOMC may opt to strike. Several hawkish, but also one dovish, comments from Federal Reserve officials over the past week has left some members boxed in with another "no change" outcome potentially raising some credibility issues. 

The gold market no matter what will be looking for direction, having failed on several occasions to break the range having been established following the Brexit rally on June 24. 

Boxed in: Gold is trading between $1,300/oz and $1,350/oz.
Spot Gold
Source: Saxo Bank 

Silver has for the second time this year been through a correction extending by more than 10%. This is more than double the latest percentage drop in gold.

The white metal is nevertheless still up by 38% year-to-date compared with gold's 25% rise. That goes to show why bulls like silver. When gold walks, silver runs. Silver may be painful through corrections, but it's great when metals rally.

Why bulls like silver
Spot Silver
 Source: Saxo Bank

– Edited by Robert Ryan

Ole Hansen is the head of commodity trading at Saxo Bank.

18 September
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