Silver catches fresh bids on Tuesday and rallies to the $24.00 neighbourhood.
The technical setup favours bulls and supports prospects for additional gains.
A break below the $22.80 confluence is needed to negate the positive outlook.
Silver gains strong positive traction on Tuesday and rallies to a fresh daily high, back closer to the $24.00 mark in the last hour. The white metal, however, trims a part of its intraday gains and retreats to the mid-$23.00s heading into the North American session.
Given the recent bounce from a confluence comprising an ascending trend-line extending from November low and the 100-period SMA on the 4-hour chart, the bias seems tilted in favour of bulls. The positive outlook is reinforced by the fact that oscillators on the daily chart are holding comfortably in the bullish territory and have again started gaining traction on the 4-hour chart.
That said, RSI (14) on the 1-hour chart flashes slightly overbought conditions and holds back traders from positioning for any further gains. Nevertheless, the XAG/USD still seems poised to surpass the $24.00 mark and retest the multi-month top, around the $24.10-$24.15 area touched earlier this month. Some follow-through buying should pave the way for additional near-term gains.
On the flip side, the $23.30 horizontal support now seems to protect the immediate downside ahead of the $23.00 mark and the aforementioned confluence, currently around the $22.80 region. A convincing break below will negate the constructive set-up and prompt aggressive technical selling. The XAG/USD might then slide to the next relevant support near the $22.00 round figure.
Business activity declined sharply in December. It signals an upcoming recession – a time that suits gold particularly well.
The economic downturn is gathering pace. The flash US PMI Composite Output Index came at 44.6 in December, down from 46.4 in November. It was the sharpest decline in business activity since May 2020, excluding the initial pandemic period, since the Great Recession. The strong decrease in new orders drove the decline in business activity, as inflation and higher interest rates dampened demand.
Both services and manufacturing are suffering. The Flash US {{ecl-106US|Services}} Business Activity Index registered 44.4 in December, compared to 46.2 in November. The fall in the services was the fastest in four months and among the quickest in the series history that started in October 2009.
Meanwhile, the Flash US {{ecl-829USManufacturing PMI}} posted 46.2 in December, down from 47.7 in November. It was the fastest downturn since the initial pandemic period in 2020, which was driven by one of the sharpest declines in new orders since the global financial crisis of 2008-9.
Source: By Bart Melek, Global Head of Commodity Strategy, TD Securities
After over a decade scraping the bottom, 12-month gold lease rates have moved distinctively higher to trend above 50 bps, as US monetary policy started to tighten aggressively.
With the Fed continuing to take rates higher in the face of sky-high inflation, real interest rates will continue to rise at an accelerated rate across much of the short end of the Treasury curve. With that, speculative long activity will wane amid higher carry and rising opportunity costs. This implies that gold yields should reach multi-decade highs into 2023.
The widespread view that gold does not offer a yield is a misconception. While income generation from gold is generally not available to most private investors, central banks can actively manage their holdings to deliver returns. This can happen in two major ways: (a) bullion reserves can be lent out to earn the gold deposit rate, or (b) the metal can be swapped for dollars at the gold offered forward rate (GOFO) or the swap rate.
While central banks are also likely to capitalise on the higher gold yield environment by making gold available to the market, they are unlikely to reduce holdings. Gold reserves offer the benefit of being highly liquid holdings, which possess both pro and counter cyclical properties, are a well-recognised store of value for many millennia and are considered strategic assets which are no one’s liability. Physical holdings are also impervious to sanctions.Gold Interest Rate Mechanics
Central banks can generate material yield from gold holdings via uncollateralised loans to a bullion bank. Given that the yellow metal is a monetary asset for central banks, it can be lent out on a term deposit like any other currency in their reserve portfolio. Most commonly, a central bank will place gold on deposit with a bullion bank, in return for a deposit rate. Maturities can vary, but 1-month, 3-month and 12-month tenures are the most common. At maturity, the gold is returned with the interest paid either in gold or fiat.
Deposit rates are derived and set independently by bullion banks. Due to gold’s inherently lower risk (eg. no one’s liability), the yellow metal tends to deliver lower returns than corporate or even government bonds.
Yield from their gold holdings can also be generated via a gold swap, or more specifically, a repurchase agreement that simulates a swap. In this instance, a central bank sells its gold to a bullion bank with the promise to buy back the gold at a later date. The central bank pays interest equivalent to the GOFO rate (forward swap rate).
In this context, the GOFO rate is akin to a US dollar loan using gold as collateral. Formally, it is defined as the rate at which market-making members of the London Bullion Market Association (LBMA) will lend gold on swap against US dollars. The central bank is then able to reinvest the funds at LIBOR (more recently SOFR) and earn the premium between the dollar rate and GOFO, which amounts to the gold lease rate.
The gold lease rate is typically an over-the-counter instrument, it can be best comprehended through the interaction of the demand and supply of borrowed gold, which will be the focus for the purpose of discussion.
Entering a forward sale agreement
Exiting the forward sale agreement
Source: World Gold CouncilDecades-High Gold Yields – A Potential Boon For Central Banks
While volatile, we project that the market environment is conducive to delivering consistently higher positive lease rates, which should be quite accretive for central banks willing to deposit metal with a bullion bank in good standing.
Six-week-old ascending trend line acts as the key support.
Silver price (XAG/USD) fade the previous day’s recovery to around $23.25 during early Monday.
In doing so, the bright metal retreats from the 61.8% Fibonacci retracement level of March-August downside and the 10-DMA level. It’s worth noting that the stated Fibonacci level is also known as the golden ratio and is considered a strong technical resistance.
Not only the metal’s pullback from the strong resistance but the looming bear cross on the MACD, as well as the nearly overbought RSI (14), also tease the Silver bears.
However, a clear downside break of the 10-DMA support near $22.00 appears necessary to convince sellers.
Following that, an upward-sloping trend line from November 03, close to $22.60 by the press time, could challenge the XAG/USD bears before directing them to the 50% Fibonacci retracement level of $22.25.
If at all, the Silver bears keep the reins past $22.25, the odds of witnessing a slump toward October’s peak of $21.25 can’t be ruled out.
On the flip side, a daily closing beyond the 61.8% Fibonacci retracement level of $23.40 could recall the Silver buyers and can poke the monthly peak surrounding $24.15.
Australia’s A$200 billion ($134.28 billion) sovereign wealth fund is increasing exposure to gold, commodities, private equity and infrastructure as it warns the future will echo the low-growth, high-inflation era of the 1970s.
By Lewis Jackson
SYDNEY (Reuters) – Australia’s A$200 billion ($134.28 billion) sovereign wealth fund is increasing exposure to gold, commodities, private equity and infrastructure as it warns the future will echo the low-growth, high-inflation era of the 1970s.
The Future Fund outlined the changes, which also included widening its currency basket, in a note on Friday that questioned the value of traditional 60-40 portfolios and called for an investing shift to confront a world dealing with war, inflation and climate change.
“In this kind of environment there is a real risk of simultaneous slow growth, high unemployment, and rising prices that has some parallels with the stagflationary period that struck developed markets in the 1970s,” the note said.
Investors large and small are scrambling to adjust portfolios and philosophies undermined by the simultaneous cratering of equity and bond markets.
The eight-page note called time on four decades of investment tailwinds including falling interest rates and taxes, energy abundance and growing globalisation driven by China’s rise.
Investors now faced a world corrosive to asset prices: more war, the risk of capital controls and confiscations, bigger government, and the spectre of higher inflation.
In response the Future Fund is implementing six broad sets of changes, including more focus on dynamic asset allocation and liquidity.
“There are no simple answers for the investment community. Traditional approaches have delivered strongly, but it is doubtful they are fit for purpose in the future,” it said.
Report authors argue Russia’s invasion of Ukraine hints at a future of destabilised energy markets as well as higher inflation and taxes as countries prioritise security and resilience over efficiency.
($1 = 1.4894 Australian dollars)
(Reporting by Lewis Jackson; Editing by Stephen Coates)
Source: World Gold CouncilDecades-High Gold Yields – A Potential Boon For Central Banks