By Ole Hansen, Head of Commodity Strategy at Saxo
The commodities sector has started March on a firm footing with broad gains supporting the best weekly performance since October, and while obesity drugs and AI continue to receive a lot of bandwidth in the stock market, this week in commodities belonged to precious metals, not least gold which was heading for its strongest two-week gain since July, in the process racing higher to reach a record high.
Gold focus shifts to consolidation after record run
In our latest weekly update, we mentioned how the gold market last month showed signs of strength, trading flat on the month despite seeing US Treasury yields shot higher after US data strength earlier in the month had further delayed the expected timing of the first and depth of subsequent US rate cuts. Towards the end of February, the yellow metal was increasingly behaving like a coiled spring, wanting to trade higher despite yield headwinds, but held back by worries about continued data strength. However, after an in-line US PCE core deflator print was followed by a weaker ISM manufacturing print, buyers threw caution to the wind and rushed into the yellow with momentum buying giving it additional strength once a key band of resistance, which is now support, between USD 2075 and USD 2088 were broken.
At the end of last year, we forecast gold could reach USD 2300 in 2024, so while the latest rally is in line with our general view on the direction of gold, we have been left surprised by the timing of the run up to a fresh record. Given the need for rate cuts to attract ETF investors back into gold we have been calling for patience regarding the timing of the next move higher. Without any participation from ETF investors who sold 9 tons this past week, the rally has primarily been driven by under-invested hedge funds forced back into the market as several key resistance levels got broken.
Underlying support has for months been provided by central banks, some of which are buying gold in order to reduce their exposure to the dollar, and continued strong demand from retail investors in Asia, most notably in China where stock market weakness and falling property prices are forcing the middle class to look elsewhere. In addition, we believe that heightened geopolitical tensions around the world have reduced the short-selling appetite, basically all strengthening gold’s current buy-on-dips credentials.
Without a notable pickup in demand from investors in ETFs to pick up the baton from hedge funds that will soon reach their desired level of exposure, gold may hit a plateau followed by a period of nervous trading as recent established longs may reduce exposure. Overall, we maintain our USD 2300 target with the technical picture potentially pointing to an even higher level around USD 2500.
Top performing silver supported by gold and copper strength
Silver is the best performing commodity this past week after the semi-industrious metal on top of the tailwind from gold received an additional boost from industrial metal strength, not least copper which recorded its highest close for the year amid continued supply worries and demand optimism in China in the coming months, especially if the government announces measures to support metals intensive sectors like property and infrastructure. While gold has reached a fresh record, silver has yet to send a strong technical signal with another +5% move needed before challenging key resistance in the USD 26 area.
Copper, rangebound since mid-2022, and the past nine months within a relatively narrow USD 3.50 to USD 4.00 range, is showing signs of fresh strength, supported by dollar softness, supply tightness, and China demand optimism. The weekly chart points to a breakout that needs a move through USD 4 to be confirmed.
