Over the last couple of days, gold has finally rebounded after falling below $4,000 per ounce. Silver’s weekly gain of 3.3% has drawn notice, not just because it’s the strongest-performing commodity this week. Platinum, which often moves in tandem with silver, is the second-best performer as well. Does this strong surge in precious metals mean there is momentum to keep pushing them higher?
One important element to keep in mind is gold’s relative underperformance last week. Traders wondered why the yellow metal was sliding, particularly amid higher inflation and persistent uncertainty around the situation in the Middle East. The safe-haven, store-of-value asset would be expected to gain in the current circumstances. Does this recent move suggest that the traditional trend for gold is reasserting itself?
The Dollar Falls Despite Warsh
The first important factor to consider is the evolution of the dollar. Through June, and particularly after the last FOMC meeting, markets priced in a higher chance of a Fed rate hike this year. At the time, US economic indicators were pointing to resilience, supporting the greenback. That put natural downward pressure on precious metals.
The effect was reversed this week, after Fed Chair Keven Warsh spoke at the ECB’s Forum at Sintra. There, he spoke harshly about bringing inflation down, suggesting it was his chief concern. Markets initially priced in a stronger dollar, but then Thursday’s NFP showed that the jobs market wasn’t as solid as expected. While the headline number was lower than anticipated, what shook traders more was the downward revision of prior NFP figures. That suggested that the weakness in the labour markets has been around for a couple of months. If the Fed does tighten, it will be into a shaky economy, and that makes traders more nervous. As a result, they were more likely to prefer buying other stores of value, such as gold, as the dollar weakened.
The China Factor
But the dollar does not explain the whole move. One important factor for gold is that earlier in the year, its spot price was driven higher by speculators. So, its current price looks low compared to the first quarter, but the prior highs might not have reflected its intrinsic value. That is even more important for silver, which has more speculative interest at the time.
China is by far the largest buyer of gold. But, with the closure of the Strait of Hormuz, the Asian Giant had to focus on managing its energy supplies, which was a distraction from gold buying. Now that the Strait is reopened and oil is flowing, China can resume gold buying. Silver is also in focus, as fundamentals could be catching up with the price once again. Analysts have argued that the spike higher in silver earlier this year exceeded the fundamental value, even though the price of silver should have continued to rise.
Factors to Watch Out For
The war in the Middle East has spurred renewed interest in energy self-sufficiency, including the build-out of photovoltaics. China was already full speed ahead in PV build-out. Silver is an essential component for photovoltaic panels, which account for half of its use. The resurgent demand could support silver’s fundamental price.
Whether that dovetails with further dollar weakness will likely depend on developments in the Fed’s rate outlook. Next week, several dollar-relevant events, including the trade balance and the FOMC minutes, could shake up the precious metals market. After Warsh’s comments, the data could have a bigger impact on the markets going forward.
