Quote on Gold and silver: Fearing the Fed, again by Carsten Menke, Head Next Generation Research, Julius Baer
Below the Quote on Gold and silver: Fearing the Fed, again by Carsten Menke, Head Next Generation Research, Julius Baer
Selling pressure in the gold and silver markets intensified again on fears of further interest rate increases by the US Federal Reserve. The markets are still grappling with a dramatic shift in the fundamental backdrop compared with a year ago. While fundamentals played their part in pushing prices lower, flows acted as an amplifier. Nervousness prevails, suggesting that volatility is set to stay elevated at least in the short term. The medium-to-longer-term outlook remains compelling and we stick to our established views.
Just when it appeared that gold and silver had regained their footing, both metals suffered another setback. Selling pressure intensified after US Federal Reserve (Fed) Governor Christopher Waller suggested that a 50-basis-point rate hike could be considered at the central bank’s next meeting in December. The US inflation data did not provide any help in alleviating fears of further interest rate increases, pushing gold and silver prices down by as much as 2.5% and 3.5%, respectively. The gold and silver markets are again fearing the Fed, while still grappling with a dramatic shift in the fundamental backdrop compared with a year ago. This time last year, the markets expected lower US interest rates and a weaker US dollar, while at the same time being increasingly concerned about political interference with the Fed. Today, the backdrop could not be more different. While fundamentals played their part in pushing prices lower over the course of this year, flows acted as an amplifier. Looking at the source of the fastest flows, the futures market, there has been some position squaring in the US. Speculative traders and trend followers were caught on the wrong side of the market after the US Treasury buyback announcement in late summer. Since then, sentiment has become much less bullish, a shift reflected in the performance of gold and silver prices. Something similar has been happening in China, which has become a hotspot for speculation in the gold and silver markets this year. Some of the selling pressure in China may also have been linked to a crackdown on offshore capital, prompting certain investors to liquidate their gold and silver positions to foot the tax bill. While this was unlikely a major source of selling, it added to an ongoing shift in market sentiment. Nervousness prevails in the gold and silver markets, suggesting that volatility is set to stay elevated at least in the short-term. From a flow perspective, we still see the level of USD 4,000 per ounce of gold and USD 50 per ounce of silver as key. Prices breaking decidedly below those levels could trigger more selling, in particular from Western investors, who have been holding onto their positions as of late. Taking a medium- to longer-term perspective, the outlook remains compelling. Inflationary pressure in the US should ease over the course of next year, allowing the Fed to be less aggressive than currently feared. Both gold and silver should furthermore be supported by renewed concerns about US indebtedness and the associated interest rate burden. While gold also benefits from central-bank buying as a strong structural source of demand, this is not the case for silver. We stick to our views: Constructive on gold and Neutral on silver.
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