Metals Shine

The week kicked off with quite a solid appetite, especially for commodities. Gold advanced to a fresh record and traded at $2450 per ounce yesterday despite a further rebound in US yields after more Federal Reserve (Fed) members voiced their preference for keeping the rates ‘high for longer’. Loretta Mester said that she no longer sees three rate cuts appropriate, Vice Chair Michael Barr insisted that current rates need more time to bring inflation down to 2%, Mary Daly isn’t confident that inflation will ease sustainably and Phillip Jefferson poured cold water on last week’s post-CPI optimism, saying that the data was encouraging but cooling is slower than he’d like.

Higher US yields increase the opportunity cost of holding the non-interest bearing gold and is not necessarily supportive of gold prices, but on the other hand, there is a broad-based and a growing worry that high-for-longer interest rates in the US will increase the debt burden on the US government and make the American debt – and the interest payments – unsustainable.

There is also the robust central bank buying – the central banks reportedly tripled their gold holdings since Russia invaded Ukraine and US blocked the Russian Central Bank’s US holdings.

Then, the geopolitical tensions around the world remain relatively high with war in Ukraine and in the Middle East, the tensions between China and the West remain relatively tight, China remains a serious threat in the South China Sea, Taiwan feels the heat every day. And the cherry on top: the uncertainty spurred by the death of the Iranian President added to the present positive dynamics on Monday.

For those who wonder whether the gold rally could extend, the answer is yes, it could. Trend and momentum indicators remain supportive of a further rise, the RSI doesn’t yet warn of overbought conditions. The $2500 per ounce psychological mark is probably the next natural target for the gold bulls against the US dollar.

Silver’s rise

The gold-silver ratio, also called the mint ratio, tanked to the lowest levels since January 2022 as gains in silver outpaced gains in gold. In fact, silver gained more than 20% against gold since the beginning of the year because… silver is a precious metal that’s used in industries – thus benefitting grandly from the so-called reflation trade. And silver is also used in clean energy like in solar panels – very popular these days. Value-wise, the mint ratio has historically fluctuated within the 60-80 band, and since 2021, it settled sustainably above this historical range. Presently, it is back within the range, but silver has room to gain against the yellow metal if the reflation narrative remains a major driver. In this respect, the gold-silver ratio could easily retreat toward 68 – the level that’s considered as the long-term historical average.

Speaking of reflation, copper futures also refreshed record on Monday. The widening gap between solidly growing demand for the red metal and sluggish global supply support the price rally, while the reflation trade further boost the demand outlook.

Interestingly, crude oil finds it hard to clear a major resistance near $80pb – a level that shelters the 200-DMA and the major 38.2% Fibonacci retracement on the ytd rally. While the Middle East tensions, rebound in Chinese industrial production, the reflation trade – that’s supported by the prospects of central bank rate cuts – and OPEC’s determination to restrict output remain supportive factors, the record US production and comfortable spare capacity from OPEC are pointed as factors that prevents oil bulls from confidently buying oil above $80pb. Another limit to oil appetite is the fact that rising oil is inflationary and a strong bounce in prices quickly revives the central bank hawks and tempers the reflation trade. All in all, oil could extend gains above the $80pb level, but the rise will likely be soft and slow. A rise toward the 50-DMA, near $82pb is plausible.

Elsewhere, the nat gas prices are finally picking up the momentum that many were waiting for, for months. So, enjoy the ride.

Of course, the commodity rally is also a boon for mining stocks, and the FTSE 100 has plenty of them in its pockets. The British blue-chip index is well positioned to benefit from the unfolding reflation narrative, especially if we see sterling retrace gains in the coming weeks – which I think is a growing possibility if tomorrow’s British inflation print satisfy the Bank of England (BoE) doves.

Elsewhere, Nasdaq 100 advanced to a fresh ATH, as Nvidia rallied 2.50% yesterday after Barclays lifted its price target from $850 to $1100 per share saying that it sees more revenue upside to current estimates. Nvidia will reveal its latest quarterly results tomorrow after the bell and can’t afford to drop the ball.