12/12/2024

Gold and silver retreat despite SNB and ECB rate cuts

OUTSIDE MARKET DEVELOPMENTS: While the geopolitical focus shifted to Syria over the past week, Israel continues to prosecute its war against Hamas. Tensions remain high in other regions as well.

Ukrainian missiles and drones struck an oil depot and an "industrial facility" within Russia on Wednesday. Ukraine also fired six U.S.-made ATACMS missiles at a Russian military airfield.

Russia claims that all the ATCMS were shot down or defeated with electronic warfare measures. "This attack by Western long-range weapons will not go unanswered and appropriate measures will be taken," said the Russian Defense Ministry.

There are worries that the promised retaliation will come in the form of another hypersonic Oreshnik missile. Putin also warned previously that the use of NATO-provided weapons like the ATACMS could prompt a Russian response against the providers of those systems.

Earlier this week, China launched one of its largest-ever maritime training exercises in the East and South China Seas. Nikkei Asia reported that China "wants to 'pressure test' Taiwan and see how far it can go." However, Chinese forces are also operating in waters around Okinawa and the Philippines.

The Swiss National Bank (SNB) surprised with a jumbo 50 bps rate cut, halving its policy rate from 1.0% to 0.5%. It was the biggest cut in nearly a decade, bringing the policy rate to its lowest since November 2022.

The SNB noted in the policy assessment that "underlying inflationary pressure has decreased." However, growth risks have become more pronounced.

“Uncertainty about the economic outlook has increased in recent months. In particular, the future course of economic policy in the US is still uncertain, and political uncertainty has also risen in Europe. In addition, geopolitical tensions could result in weaker development of global economic activity. Equally, it cannot be ruled out that inflation could remain higher than expected in some countries.” – SNB Monetary policy assessment

The ECB followed with a 25 bps cut, as was widely expected. The central bank noted that inflation continued to edge down, but remains elevated. They also acknowledged the economy is weakening.

Today's easings come on the heels of yesterday's jumbo rate cut by the BoC and in advance of next week's anticipated 25 bps cut by the Fed. With the policy emphasis shifting from price risks to growth risks, further easing is likely in 2025.

Outgoing Treasury Secretary Yellen expressed regret about not making "more progress" on the deficit during her tenure.

“I am concerned about fiscal sustainability, and I am sorry that we haven’t made more progress. I believe that the deficit needs to be brought down, especially now that we’re in an environment of higher interest rates.” – Treasury Secretary Janet Yellen

Alluding to having made any progress at all has to be a joke. During Yellen's tenure at Treasury, the national debt has increased by $8.4 trillion to exceed $36 trillion. Not to mention the $6.8 trillion increase that occurred when she served as vice-chair and chair of the Fed.

In just the last two months alone, the federal budget deficit reached $622 bln, a $242 bln increase over the same period last year. Government outlays are up 18%, while revenue has dropped 7%.

U.S. PPI rose 0.4% in November, above expectations of +0.3%, versus an upward revised +0.3% in October (was +0.2%); 3.0% y/y, up from a revised 2.6% pace in October (was 2.4%). Core was in line with expectations at +0.2%, versus +0.3% in October. The annualized rate of producer inflation was steady at 3.4%, but October was revised up to 3.4% from 3.1%.

U.S. Initial Jobless Claims surged 17k to 242k in the week ended 7-Dec, above expectations of 220k, versus a revised 225k in the previous week. Continuing jobless claims rose to 1,886k in the 30-Nov week, up from 1,871k in the previous week.


GOLD

OVERNIGHT CHANGE THROUGH 6:00 AM CST: -$6.34 (-0.23%)
5-Day Change: +$49.63 (+1.89%)
YTD Range: $1,986.16 - $2,789.68
52-Week Range: $1,812.39 - $2,789.68
Weighted Alpha: +31.33

Gold eked out a new five-week high in Asian trading at $2,723.70 but was unable to find the stops that I thought were likely above resistance at $2,714.94/$2,719.75. The yellow metal is presently trading more than 1% lower, reinforcing expectations for consolidative trading into year-end.



Nonetheless, the underlying trend remains bullish with help from the dovish stances of key central banks which are likely to extend into 2025. Heightened geopolitical tensions are seen as broadly supportive as well.

The BoC, SNB, ECB, and PBoC have all indicated rising concerns about growth, suggesting they may be more aggressive in cutting rates moving forward. Meanwhile, the resilient U.S. economy may prompt the Fed to be less aggressive in early-2025. The resulting shift in interest rate differential expectations is buoying the dollar, which is limiting the upside in gold.

The World Gold Council released its Gold Outlook 2025 today. "Gold is poised for its best annual performance in more than a decade – up 28% through November," trumpets the WGC. It has indeed been a great year with record highs established through late October.

The WGC remains bullish on gold for 2025, but their outlook is nuanced: 

“The market consensus of key macro variables such as GDP, yields and inflation – if taken at face value – suggests positive but much more modest growth for gold in 2025. Upside could come from stronger than expected central bank demand, or from a rapid deterioration of financial conditions leading to flight-to-quality flows. Conversely, a reversal in monetary policy, leading to higher interest rates, would likely bring challenges. In addition, China’s contribution to the gold market will be key: consumers have been on the sidelines while investors have provided support. But these dynamics hang on the direct (and indirect) effects of trade, stimulus and perceptions of risk.” – World Gold Council

If inflation reverses direction, central banks might have to revert to a more restrictive monetary policy, which would be a headwind for gold. Potential US tariffs are seen by many as a risk that could drive up inflation.

We'll have to wait until after 20-Jan to see how U.S. trade policy unfolds. Some central banks have specifically blamed Trump's tariff threats for stoking uncertainty.

I'm sticking to my choppy/consolidative call for the last several weeks of this year. Given this year's stellar price performance, investors and traders will likely look to lock in profits on upticks within the range. At the same time, gold is still in an uptrend so setbacks within the range continue to offer buying opportunities.

Today's Asian high at $2,723.70 now marks an intervening barrier ahead of the $2,736.55 Fibonacci level (78.6% retracement of the decline from $2,789.68 to $2,541.52). Above the latter, chart resistance at $2,748.72/87 is the last significant barrier ahead of the $2,789.68 all-time high.

Yesterday's low at $2,678.27 has contained the downside thus far, keeping the 50-day moving average ($2,670.62 today) at bay. The latter protects the 20-day MA at $2,648.96 and this week's low at $2,628.79.  
 

Silver reached a five-week high of $32.306 in overseas trade, but for the fourth straight session gains above $32.00 could not be sustained. Today's weakness in gold, this week's upward bias in the dollar, and ongoing concerns about economic growth in much of the world weigh on the white metal.



Silver plunged more than 4% intraday to challenge important support at $30.958/900, where the 20-day moving average corresponds closely with the low for the week. A breach of this level would shift focus to the 100-day moving average at $30.523.

Last week's low at $30.080 provides an additional tier of support ahead of the double bottom at $29.736/703. I continue to favor range trading into year-end, although as mentioned, the range may have narrowed to $32.306/$29.703.

A rebound above the midpoint of today's range at $31.628 is needed to ease short-term pressure on the downside. The $32.278/306 level has been fortified as a key resistance.


Peter A. Grant
Vice President, Senior Metals Strategist
Zaner Metals LLC
Tornado Precious Metals Solutions by Zaner
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