Stocks, Futures Soar; Precious Metals Cool Off?

2024-07-20 31 Comments

Recently, both the stock and futures markets have seen significant gains, and the sentiment for risk aversion has faded from discussions. The fervor for precious metals has begun to cool down. Is that the end of the story for precious metals? Hold your horses! Let the dust settle for a while first!

Should it be a 25BP or a 50BP cut? That is the question!

The Federal Reserve has conducted a monetary policy operation to lower the federal funds rate target range by 50 basis points to 4.75%-5.00%, which aligns with the expectations indicated by interest rate futures before the interest rate meeting. In the monetary policy statement, the content has been enriched with a commitment to "supporting maximum employment," reflecting Powell's emphasis on the labor market in the past. He further stated in his subsequent speech that if he were to learn about the subsequent employment data at the July interest rate meeting, he would have cut rates at that time.

Under such a monetary policy stance, the key economic data that will determine the magnitude and frequency of the Fed's rate cuts in the future will be the monthly changes in non-farm employment and the unemployment rate published at the beginning of each month. The economic outlook report also shows a dovish monetary policy expectation. The Fed has revised down its expectation for the core PCE inflation rate in 2024 from 2.8% in June to 2.6%, and the unemployment rate has been revised up from 4% to 4.4%. The dot plot indicates that the expected federal funds target rate has been revised down from 5.1% to 4.4%, which means there will still be room for a 50 basis point rate cut within the year.

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Powell, who is playing Tai Chi, and the enigmatic non-farm data!

After the Fed's interest rate cut at the September meeting, the market fully traded the expectation of an accommodative monetary policy. However, Powell cooled down market expectations by clearly stating that the Fed is not in a hurry to cut rates rapidly but will make decisions based on data. He believes that the U.S. economic conditions are good and expects two 25 basis point rate cuts this year.

Subsequently, the non-farm employment data released on Friday significantly exceeded expectations. The number of new non-farm employees in the United States in September was 254,000, significantly higher than the expected 140,000 and the previous value of 159,000. The U.S. unemployment rate in September was 4.1%, lower than the expected and previous 4.2%. After the release of the non-farm data, the market's expected rate cut and Powell's stance have become more aligned. The market currently prices the probability of a 25 basis point rate cut at the Fed's November 7 interest rate meeting at 95.19%, and the cumulative probability of a 50 basis point rate cut by the December 18 interest rate meeting compared to the current rate cut (a 25 basis point rate cut at the December interest rate meeting) is 89.6%.

With the election approaching, the room for the Fed's monetary policy changes within the year has become relatively limited, and its push on gold and silver prices will be marginally moderated. The main contradiction in the subsequent international gold price transactions will shift to the fiscal deficit expectations after the U.S. election.

What does the slowdown in the increase of global gold ETF holdings mean?Data from the World Gold Council shows that the increase in global gold ETF holdings has slowed down, with Asia and Europe turning to reductions. In the week of September 20th, the global gold ETF holdings increased by 3 tons, lower than the previous value of 11.7 tons. Among them, North America increased its gold ETF holdings by 8.1 tons due to the influence of the Federal Reserve's monetary policy, while Asia reduced by 1.7 tons, and Europe reduced by 4.4 tons, with other regions increasing by 1 ton. Gold ETFs have seen a noticeable regional reduction for the first time since mid-August, indicating a decline in their allocation appeal.

The latest data from the Commodity Futures Trading Commission (CFTC) shows that the net long positions of COMEX gold and silver management funds have retreated after reaching a high for the year. As of the week ending October 1st, the net long position of COMEX gold management funds was 214,400 contracts, down by 4,567 contracts from the previous value; the net long position of COMEX silver management funds was 37,300 contracts, down by 5,837 contracts from the previous value.

Will gold and silver diverge again?

Precious metals have shown strong price performance after the Federal Reserve entered a substantive interest rate reduction cycle. However, current economic data, represented by U.S. non-farm employment figures, show resilience, and the Fed Chairman's cautious stance on the extent of future rate cuts suggests that there will be no unexpected rate cuts within the year. The boost to precious metal prices from monetary policy expectations will likely moderate. The focus of market trading will gradually shift to expectations for U.S. fiscal policy after the election, and in the short term, the drivers for gold and silver prices are weakening. Silver inventories have not yet clearly realized the tightness expected from industrial demand, and there is a risk of price decline. However, in the long term, precious metals after substantive rate cuts still offer opportunities to buy on dips. On this point, there is no need to rush! Let the bullets fly for a while first!

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