Gold Q4 outlook:
The bond rout and surge in yields finally took their toll on gold prices late September, which saw gold (XAU) finally break below $1900 despite holding up well to dollar strength through most of Q3. We can see that the cycle high in gold coincided with the latest surge in yields, and gold could remain susceptible to selling pressure if the bond rout persists.
With that said, there could come a point where investors flock to gold as a safe haven if the bond selloff gets out of hand, although we’re clearly not there yet. And if yields fall sharply (as bond prices rise), it could also mark a low for gold.
Mixed dynamics for gold
According to the Gold Council, ETF flows in North America and Europe have remained negative this year so far, and while flows remained positive in Asia, it has not been anywhere near enough to offset net-negative flows globally.
On the other hand, central banks remain net buyers, with China and Japan accounting for the largest increase of their gold reserves in Q2. And that could help explain why gold remained elevated against other currencies while XAU/USD began to underperform in Q3.
However, with the gold basket tracking XAU/USD lower, investors are clearly selling gold into October, a month that is seasonally bearish.
October tends to be bearish for gold:
The most bearish month of the year over the past 45 has been October, with an average return of -0.51%. Over that period, average negative returns have been -3.5% compared with positive average returns of 3.2%, and it has closed lower 55.6% of the time. With sentiment negative for gold whilst it remains relatively high in its 4-year range, perhaps we’ll see a continuation lower at the beginning of the quarter.
However, increased jewellery demand helps gold deliver positive average returns in November and December of 0.71% and 1.3% respectively. And a seasonally weaker dollar in December helps gold post its second best month of the year on average.
Market positioning, seasonality
Futures positioning is not really giving away any strong clues. Large speculators remain net long although gross and shorts are trending sideways. Asset managers have increased their net-long exposure, although came close to net short in late August. If anything, it serves to remind us that investors remain bullish on gold, even if the near-term dynamics are less favourable.
Market outlook
Gold trades within a bearish channel and momentum has accelerated to the downside. Assuming 1950 is the high with a $180 16-quarter ATR, is suggests a range of $1770 - $1950. From here, we prefer to fade into rallies towards $1800 support next its current YTD low, where profit taking could entice a recovery rally. Yet with bullish seasonality heading into the end of the year, we’d consider dips above $1730 for some mean reversion towards $1900, or $1950 max.
WTI crude oil Q4 outlook:
Oil prices rose in Q3 in line with our bias, but its pace and level reached far surpassed our anticipated $70-$80 range. In fact, it enjoyed its best quarter since Q2 2020, when it rebounded from negative prices.
A lethal combination of tighter supply alongside record levels of demand provided the ideal bullish catalyst to pump WTI crude oil above $90. And with OPEC+ seemingly happy to keep supporting prices, concerns over a second round of inflation are well grounded. Yet whether it can maintain such strong returns in Q4 is debatable, even if the case remains bullish.
Tighter supply has supported oil in Q3:
- OPEC+ extended oil production cuts through to the end of Q4
- Floods in Libya (a top 20 oil exporter) provided a supply shock
- Underinvestment in new production in recent years due to lower oil prices saw production lag the recent surge in demand
Stronger demand has also been a factor for higher oil prices:
- Strong summer air travel and surging China petrochemical activity has seen saw demand “scaling record highs” according to the Energy Information Administration (EIA)
- The EIA expect demand to rise to 102.2 million barrels per day in 2023 (up 2.2 mbpd), before slowing in 2024.
- Whilst US production continues to rise, it is not at a fast enough pace to offset OPEC’s cuts
Market positioning, seasonality
Market positioning has become increasingly bullish in Q4, after net-long exposure among large speculators lifted itself from 14-year lows. Gross longs were ramped up in recent weeks, although net-long exposure is not near a sentiment extreme. The WTI time spread is also bullish, with the front-month contract rising relative the second month contract.
However, October and November have historically been the weakest months of the year for WTI over the past 44 years, with December only providing modest gains. Seasonal patterns could provide some headwinds in Q4, or prompt some bulls to book profits or scale back bullish bets as we near the year end.
Market outlook
However, it’s also possible we have seen the meat of the move and that we’re closer to the end of its rally than the beginning. WTI has rallied nearly 40% since the June low and has risen for four consecutive months. Whilst that is not reason to be against the move, caution may be required if or when it break above $100.
Conclusion
- Oil prices remain in a strong uptrend with bullish fundamentals supporting the move, although seasonality may provide a slight headwind for gains
- Whilst rising oil prices could eventually dampen demand, slow the global economy or even trigger a recession – there is not guarantee it will happen in Q4
- Whilst a move above $100 seems possible in Q4, it remains debatable as to whether it can close above it following such a strong Q3
- We therefore favour buying dips following pullbacks, whilst monitoring its potential for interim highs if the fundamentals shift or traders book profits around obvious levels
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