Gold & Silver Surge Amid Crude & Copper Carnage

As the growth mirage fades (and short-squeeze ammo runs out), so crude and copper carnage is reappearing. Amid its biggest plunge since early Jan, Copper is now down 10 of the last 12 days and crude is plunging back towards it 50-day moving average. Amid this bloodbathery, precious metals are bid as Saxo Bank sees Gold “heading back to its highs and beyond.”

Copper & Crude carnage continues as PMs are bid…


The biggest plunge in copper since September 2015…


Which as Saxo Bank’s Ole Hanson notes, is likely driven by NIRP’s spread across the world

  • New World Gold Council report cites negative rates as key XAU factor
  • Large portion of the world’s sovereign debt now holds negative interest rates
  • US earnings season trouble may also boost gold’s fortunes

A world below zero

A world below zero: many of the world’s central banks have taken the plunge into negative rates, and one potential consequence may be higher precious metal prices. Photo: iStock

Last week saw the World Gold Council release its latest market update titled “Gold in a world of negative interest rates”. The moves towards negative rates have probably been among the main catalysts behind the change seen in investor sentiment so far this year.

Following its January surge, gold has now been trading sideways for almost two months. During this time, the market has been contemplating whether the strong surge in investor demand witnessed since the beginning of the year could lead to profit-taking.
This is a particular concern given what happened last year, when gold followed a strong start with a sudden reversal in April. The selloff continued for the remainder of the year, marking one more false start among the many seen since the peak in 2011.

Strong gold demand during Q1

One of the main reasons for the belief that this time will be different was highlighted in the market update from WGC. The implementation of negative interest rates by central banks in Europe and Japan has seen trillions worth of sovereign government debt move to negative yields.
To this, the WGC writes “history shows that, in periods of low rates, gold returns are typically more than double their long-term average”.
A large portion of sovereign debt now carries negative interest rates; about 30% of high-quality sovereign debt (more than $8 trillion) trades at negative yields, and this figure rises to 51% once inflation is factored in.

Negative interest rates

Source: Bloomberg, WGC
Among the investments increasingly popping up as alternatives to no-yield bonds are precious metals. The WGC highlights four reasons why negative interest rates will structurally increase demand for gold as a portfolio asset:
  • Reduces the opportunity cost of holding gold.
  • Limits the pool of assets some investors/managers would invest in.
  • Erodes confidence in fiat currencies due to the threat of currency wars and monetary intervention.
  • Further increases uncertainty and market volatility as central banks run out of effective policy options to combat inflation/deflation and/or spur growth.
(The update, which includes a detailed look at the aforementioned points, can be accessed here.)
After finding support below $1,210/oz on numerous occasions, gold has made a renewed attempt to the upside today. This has peen particularly aided by the latest FOMC minutes yesterday, where caution about raising US interest rates was a prominent topic of discussion.
Even if we come to see higher US interest rates, it does not change the outlook for very low and negative global interest rates elsewhere.
The first-quarter US earnings season kicks off next week and despite seeing the S&P 500 trading near the highs, the market is bracing itself for the worst season since the 2009 crisis.

Earnings recession

In our quarterly outlook released earlier this week, we highlighted the upside potential for gold following a period of consolidation. A weaker dollar (most recently against the JPY), the risk of rising stock market volatility, and the continued focus on negative interest rates may attract renewed interest for gold and silver earlier than expected.
Spot Gold
From a technical perspective, we see two important resistance levels. First of all there is $1,245/oz, which apart from being the recent top also represents a 50% retracement of the March selloff.
A break above the more important $1,255 area – the 61.8% retracement – would signal a return to the high and potentially beyond. The key area of support remains between $1,165/oz and $1,195/oz.


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