The sharp rise in bond yields has been a crucial factor in major market moves early in 2022. Pricing in the tightening of monetary policy by the Federal Reserve has driven this move. However, precious metals have not reacted according to their historical corrections. The elevated geopolitical risk arising from the conflict over the Russia/Ukraine border is helping to lend support. There are suggestions that this is also helping the oil price to remain at elevated levels. The longer this uncertainty continues, the longer these moves will sustain.
- Real yields are not driving precious metals, for now
- The impact of geopolitical risk on commodities
- Technicals remain positive for precious metals and oil
Real yields still not impacting commodities
Inflation expectations have fallen in early 2022. This has come at the same time that US bond yields have risen sharply. Subsequently “real” bond yields (a reflection of interest rates minus inflation) have risen even more sharply.
Going on historical performance, sharp rising real yields should be negative for precious metals such as gold and silver.
The traditional negative correlation for Gold and real yields has turned sharply positive for now. Previously, this has not tended to last for too long. However, gold is not reacting as it should be to rising real yields.
It is a similar picture for Silver, which has also been rallying at the same time that real yields have been moving higher.
There can be two explanations for this:
- That the rise in real yields has been so fast that it has played into the negative risk sentiment. Precious metals find support on risk-off trading.
- Precious metals have been supported by the elevated geopolitical risk from the potential conflict at the border of Russia and Ukraine.
There is a sense that it is a combination of both, however, gold has been notably supported as the geopolitical tensions have been bubbling up in recent days. While this continues we believe that real yields will not be the primary driver of precious metals.
Oil is being driven by geopolitics
It is also worth noting that according to Argus Media, geopolitics has been driving the oil price higher recently. There have been several geopolitical spats in the Middle East with attacks on pipelines affecting the UAE. However, the conflict at the Russia/Ukraine border is also playing a key part.
The prospect of sanctions on Russia has growing potential. If there is an “incursion” over the border into Ukraine, then sanctions could be imposed, including on oil supplies. This will hamper the ability of OPEC+ to increase oil supplies, as Russia is one of the few OPEC+ suppliers that have spare capacity.
Subsequently, the longer than uncertainty over the geopolitical position remains, the longer market participants will factor in the prospect of sanctions to the oil price. This will maintain a degree of underlying support for oil.
Technicals remain positive for commodities
Looking at the charts the technical outlook remains positive for Gold, Silver, and Oil.
Gold (MT5 code: XAUUSD) has been tracking higher lows and higher highs since early December. Breaking above $1832 the price is now using this as a basis for support (old resistance becomes new support). Whilst this is intact the near-term outlook will remain positive.
It may be that the outlook for gold will remain positive whilst the uncertainty surrounding Russia and Ukraine continues. Reaction to the $1828 support will be a key reflection of this.
It is a similar position for Silver (MT5 code: XAGUSD). The outlook remains positive within the medium to a longer-term trading range. Support at $23.25/$23.45 is key to the continuation of this.
Silver has been hit in recent sessions as risk appetite has come under growing pressure, but the outlook for recovery within the trading range continues.
Brent Crude Oil (MT5 code: UKOUSD) has been trending higher since mid-December. Recent volatility has meant intraday breaches of trendline support but the outlook remains positive. Momentum is strong and there is an appetite to buy around $85/$86 right now. We see supported weakness as a chance to buy.
