Today's edition of the Saxo Morning Call features the SaxoStrats team discussing the continuing weakness of the US dollar as commodity prices recover ground and in the wake of key US equity indices hitting all-time highs Thursday.
Article / 16 March 2017 at 9:08 GMT

What's next for gold after dovish FOMC jump? — #SaxoStrats

Head of Commodity Strategy / Saxo Bank
  • Precious metals rally following dovish Fed statement
  • Hedge fund interest faded into FOMC announcement
  • 'Gold needs to hold above $1,221/oz': Hansen

Gold prices rallied in the wake of Wednesday's FOMC decision. Photo: Shutterstock 

By Ole Hansen

Gold and silver both spiked higher yesterday with history repeating itself for a third time. The dovish rate hike triggered short-covering and gold returned to relative safety above $1,221/oz. With the Fed focus now fading gold is likely to stabilise with stock market gains offsetting geo-political risk demand.

For the third time in a row, US real yields responded to a US rate hike by falling. The combination of this and the weaker dollar helped trigger a recovery in gold and silver.

Spot gold and US real rates

After finding support ahead of $1,193/oz – a 50% correction of the December-to-February rally – gold spent the past week consolidating around the psychological $1,200/oz level. Investor participation has faded during the past couple of weeks, not least when looking at hedge fund positions.

In the week to March 7, funds cut the net long by 23% to 94,000 lots, just below the five-year average of 104,000 lots. In the run-up to yesterday's rate decision the risk of a hawkish hike probably reduced that interest further. 

In other words, investor positioning remains light, with no strong sense of direction at this stage. This is also reflected in the options market where traders up until yesterday had been pricing the upside and downside risk evenly. 

The price difference between call and put options with a one-month duration and a 25% delta has been hovering around flat for the past seven days. With the rally seen since yesterday this risk-reversal has now moved in favour of the calls by 0.3%.

Gold investments through futures and ETP

Following the initial spike higher, gold now needs to reestablish support at $1,221/oz. The focus will remain on incoming US data and its impact on yields and the value of the dollar. 

Geopolitical risks in Europe have faded following yesterday's Dutch election result but plenty of other hot spots currently exists which may attract demand for precious metals (probably not in order to look for gains but more in order to diversify risk across different asset classes). 

Gold needs to hold above $1,221/oz while the upside for now looks capped between $1,229 and $1,237/oz.

Spot gold with retracement levels
Source: SaxoTraderGO

Our trade idea from yesterday to buy a short-dated call option on April gold has worked well so far. With the upside limited as this stage, as per above, we seek to halve the position at $12/oz. (bought at $2.8/oz. and last traded $8.5/oz.)

— Edited by Michael McKenna

Ole Hansen is head of commodities strategy at Saxo Bank
Danno22 Danno22
Ole great call yesterday. Bought option for $170 and sold it before lunch for $850.
Ole Hansen Ole Hansen
Well done Danno
Muzza Muzza
Thanks Ole. I exited whole position at $12 I am more than happy with that result. This was a great trade idea thanks again :-)


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