Precious Metals Surge on Rate Cut Bets: Gold and Silver Near Record Highs
As central banks hint at potential rate cuts, precious metals like gold and silver have experienced significant gains, edging closer to their all-time highs seen in May. A weakening US dollar and heightened investor optimism for lower interest rates have driven this rebound.
Gold and Silver Rally in July
In July, gold futures set to expire on August 24 at Comex rose approximately 3.4%, or $78 per ounce (€72), from their low on June 28. Similarly, silver futures contracts expiring on September 24 surged 8% over the same period. Currently,gold is about 3.6% away from its record high, and silver is approximately 4.7% away from its peak. If the current momentum persists, these precious metals could not only reach but also surpass their previous records.
Factors Driving the Surge
Weakening US Dollar: The primary driver behind the rising prices of gold and silver is the weakening US dollar. These precious metals exhibit a negative correlation with the US dollar; their prices tend to rise as the dollar declines. The US dollar index, which measures the value of the dollar relative to a basket of foreign currencies, fell by 1% from its recent high on June 28. Expectations of an earlier-than-expected rate cut by the US Federal Reserve (Fed) following softer economic data, such as a contraction in the services purchasing managers index (PMI), a loosening labour market, and a slowdown in GDP growth, contributed to this decline.
Fed Rate Cut Speculations: Recent statements by Fed Chair Jerome Powell have fueled speculation about an imminent rate cut. In his testimony before the Senate and the House, Powell expressed concerns that moving interest rates too soon or too late could weaken economic growth. This increased the probability of a 25 basis point rate reduction in September to 70% from 45% a month ago, according to the FedWatch Tool. Expectations for lower interest rates reduce the cost of carrying precious metals, supporting spot market prices.
Gold and Silver: 2024's Best Performing Assets
Year-to-date, gold has risen by 15%, silver has surged by 30%, and the S&P 500 has increased by 19%. Investors perceive gold and silver as safe-haven assets, a hedge against the all-time high equity markets. Investors believe that central banks in developed countries will likely enter a rate-cut cycle in the second half of the year. Historically, financial crises often occur during intense rate-cut periods, making gold and silver attractive as safe investments. Additionally, despite the cooling of inflation in most Western countries, consumer prices remain high, further boosting the appeal of precious metals as an inflation hedge.
Global Demand and Central Bank Purchases
In June, the World Gold Council reported inflows into global ETFs for two consecutive months, driven by buying in Europe and Asia due to the weakness of regional currencies. Silver's surge is likely for similar reasons, as its prices usually correlate positively with gold. Central bank purchases remain a significant driver of gold prices. The World Gold Council's report shows that central banks added 1,037 tonnes of gold in 2023, following a record high of 1,082 tonnes in 2022. According to the 2024 Central Bank Gold Reserves Survey, 29% of central banks plan to increase their gold reserves over the next twelve months.
Short-Term Price Drivers
The US Consumer Price Index (CPI) is a critical economic indicator to watch this Friday. Consensus forecasts suggest that inflation may cool further to 3.1% in June from 3.3% in May. Easing inflation will likely continue to fuel optimism for lower interest rates in the second half of the year, acting as a catalyst for further price surges in precious metals.However, a higher-than-expected CPI reading could negatively impact gold and silver prices.
Conclusion
Gold and silver are on the verge of reaching new record highs as market conditions favour their growth. The weakening US dollar, speculations of a Fed rate cut, and continued demand from global investors and central banks all contribute to the bullish outlook for these precious metals. As inflation and economic indicators evolve, the prices of gold and silver will continue to respond, offering both opportunities and challenges for investors.