16 March 2017 at 9:08 GMT
- 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.
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%.
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.
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