Our base case remains that safe-haven demand should continue to weaken provided the US economy does not slide into recession. The bull case remains a recession as it should lead to a significant pick-up in safe-haven demand. Meanwhile, silver should continue to move in gold’s slipstream.
It seems as if gold and silver rode a roller coaster. In early July, prices were under very severe pressure and threatened to enter a vicious cycle, triggered by a stronger US dollar, rising US real bond yields and rapidly deteriorating market sentiment. What bailed markets out of this vicious circle and eventually led to a rebound was Federal Reserve Chair Jerome Powell, who hinted at a slower pace of rate hikes going forward.
As a result, the US dollar and US real bond yields reversed, boosting market sentiment and thus gold and silver prices. However, this rally has already faced resistance over the past few days as it lacked support from safe-haven seekers.
Inventories of physically-backed gold products, our preferred measure of safe-haven demand, instead continued to see outflows over the past few days and weeks. These outflows are mainly concentrated in US and UK listed products, while Swiss and German listed products remain more or less unchanged.
Given the depth of the energy crisis in Europe, this comes as a bit of a surprise, especially for Germany. The recently released minutes of the US Federal Reserve’s last meeting confirmed that US interest rates will remain high for longer in a bid to curb inflation. This provided some support for the US dollar and US real bond yields, thereby weighing on gold and silver prices.
All in all, our view of gold and silver hasn’t changed. Our baseline scenario remains assuming that the US Federal Reserve will successfully fight inflation without pushing the US economy into recession, that safe-haven demand continues to weaken, and that prices gradually decline over the medium to longer term.
The bull case remains a recession as this should attract safe haven searches back into the market, not least as US real bond yields are likely to fall further. Meanwhile, silver’s underperformance reflects increasing recessionary risks due to its primarily industrial applications. While the cyclical slowdown weighs somewhat on industrial demand, we believe that most of the price volatility is actually related to swings in market sentiment, which tend to be very pronounced in silver. In the medium to longer term, silver should continue to move in the slipstream of gold.
(The author is Head Next Generation Research, Julius Baer)
(Disclaimer: Experts’ recommendations, suggestions, views and opinions are their own. These do not represent the views of Economic Times)
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