Saxo Bank: Precious metals on defensive ahead of busy central bank week
Ole Hansen, Head of Commodity Strategy/Saxo Bank
Precious metals have been back on the defensive this past week with the shake-out in both bonds and stocks hurting the general level of the appetite for risk in the market. Next week's central bank meetings from the Federal Reserve and Bank of Japan should provide the market with some additional guidance and direction.
The US yield curve has steepened to its widest in 10 weeks on a combination of rising rate expectations and a general risk reduction driven by the latest spike in volatility. This has driven US 10-year real yields back up to a pre-Brexit high of 0.20 percent.
The negative impact of rising bond yields have prevented gold from reacting to the tailwind from a weaker dollar.
The combination of gold trading lower and the dollar trading weaker against the euro has taken XAUEUR back down towards key support at €1,170/oz. A break below could signal an extension lower towards €1,153/oz, which could add some additional pressure to XAUUSD currently trading relatively quietly.
While the risk of a rate hike next week from the Federal Open Market Committee stands at just 20 percent, the market has maintained a lingering worry that Janet Yellen and her fellow members of the FOMC may opt to strike. Several hawkish, but also one dovish, comments from Federal Reserve officials over the past week has left some members boxed in with another "no change" outcome potentially raising some credibility issues.
The gold market no matter what will be looking for direction, having failed on several occasions to break the range having been established following the Brexit rally on June 24.
Silver has for the second time this year been through a correction extending by more than 10%. This is more than double the latest percentage drop in gold.
The white metal is nevertheless still up by 38 percent year-to-date compared with gold's 25 percent rise. That goes to show why bulls like silver. When gold walks, silver runs. Silver may be painful through corrections, but it's great when metals rally.