(Kitco News) – Gold’s break below $4,000 and silver’s slide below $60 has soured sentiment in the precious metals market, with the stronger dollar and last week’s hawkish FOMC the main short-term headwinds, but other headwinds are beginning to ease, according to Ole Hansen, head of commodity strategy at Saxo Bank.
In a new analysis published Thursday, Hansen wrote that gold and silver are now firmly on the defensive, with investors either reducing exposure or exiting positions altogether.
“On a total return basis, gold is now down 8.4% year-to-date, although still up 18.5% over the past 12 months,” he noted. “Silver has suffered a much deeper setback, down 19% this year, but still up 56% over the past year.”
“The latest leg lower has been driven by the dollar’s week-long surge, with the greenback posting a fresh 13-month high on Wednesday,” Hansen said. “It continues to benefit from carryover support following last week’s hawkish FOMC message, which revived speculation that US interest rates may need to rise later this year. For non-interest-paying metals, that has lifted the perceived cost of holding exposure at a time when investor confidence is already fragile.”
Hansen warned that gold’s break below $4,000 suggests longs will continue liquidating as the yellow metal extends its 26% correction from January’s record high above $5,600 per ounce. “The technical breakdown has further undermined sentiment, forcing additional position reductions despite an underlying macro backdrop that has started to look less hostile over the past week,” he said. “The main headwinds remain the stronger dollar and continued ETF outflows, while speculative positioning has already been reduced significantly.”
Hansen also pointed to several other factors which have contributed to gold’s renewed weakness, but which are beginning to wane. “The sharp collapse in crude oil prices is easing inflation concerns, thereby reducing the need for further Fed tightening,” he wrote. “That shift is increasingly reflected in Fed funds futures, where expectations for additional rate hikes have faded, while longer-dated Treasury yields have also moved lower.”
Major Chinese banks are also curbing retail precious metals trading after recent volatility and price drops, he noted. “Measures include freezing new accounts, discontinuing intermediary trading services and sharply raising margin requirements to restrict highly leveraged speculative activity among retail investors.”
All told, Hansen said gold’s fundamental backdrop is actually becoming less hostile, even as the price action remains weak. “For now, the market needs to see ETF selling stabilise and the dollar lose momentum before bargain hunters regain confidence,” he said. “Until then, precious metals are likely to remain driven more by positioning and technicals than by fundamentals.”
