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In this write-up, we emphasize on stay long Dec’18 CME gold and stay long Dec’18 CME silver
Gold: At the end of April, the dollar definitively broke out of a narrow range established since mid-January. The move higher in the 10-year Treasury yield was chiefly cited as the driver for the 2% move higher in the broad dollar index.
The dollar’s resurgence since April 18 synced with the surge in yields but also the 2% drop in spot gold prices. This sequence of events would normally be considered mundane were it not for the fact that the typical persistently-negative relationship between yields (both nominal and real, short-term and intermediate), and the gold price has broken down since last October.
It is still early days and debatable whether the period of decorrelation has ended. Given that our FX strategists maintain forecasts for a weaker USD over the next couple of quarters, we prefer to keep our long gold trade recommendation in place for now.
Initiated longs in CME gold for Dec’18 delivery at $1,352.80/oz on February 2, 2018. Added an equivalent unit at $1,327/oz on March 1, 2018 for a new entry level of $1,339.90/oz.
Silver: On the back of upward revisions on gold, we have further boosted our silver forecasts and, amidst a broader medium-term precious metals rally, see the potential for silver to outperform gold as the XAU/XAG ratio moves lower towards 70 over the second half of the year.
On the fundamental side, silver’s linkage to industrial demand makes it more exposed to a late-cycle demand thrust, which should also boost its pricing prospects, if anything. As such, we look for silver to break out higher over the medium-term, particularly given its much cleaner investor positioning.
Initiated long in silver for Dec’18 delivery at $17.10/oz in February 2018. Added an equivalent unit at $16.59/oz in March as well for a new entry level of $16.85/oz. Courtesy: JPM
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