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Below the Views on Gold and silver: QE reminiscence by Carsten Menke, Head Next Generation Research, Julius Baer

All eyes in the gold and silver markets were on the Fed’s interest rate decision. The initial market reaction to the widely expected interest rate cut was negative, reflecting a lack of consensus about the decision and a lack of clear guidance for next year. The Fed then announced a bond-buying programme to smooth stains in the money markets, which provided a boost to gold and silver. Prices gained as much as 1.6% and 4.6% following the announcement, reminiscent of the Fed’s QE programmes in the aftermath of the Global Financial Crisis. Back then, QE was associated with fears of inflation and a debasement of the US dollar. This very much mirrors today’s mood among some participants in the gold and silver markets. While boosting the already bullish market mood, historical evidence suggests no inflationary impact from such programmes. The narrative of the debasement trade had already fuelled the rally in the gold and silver markets earlier this year, but in our view, it also lacks evidence. We expect more US dollar weakness but attribute this to cyclical and structural factors rather than active debasement by policymakers. Silver’s reaction to the Fed’s announcement was again outsized, increasing its outperformance over gold since the resumption of the rally in early November to more than 20 percentage points. Considering a fairly similar fundamental backdrop for both gold and silver, we believe that such a stark outperformance is not fully justified. Rather than fundamentals, we believe this reflects the strong momentum of speculative traders and trend followers in the silver market, which is also reflected in our own technical assessment. While short-term risks are skewed to the upside because of the momentum in the market, we reiterate our view that prices have moved too far too fast and we therefore remain Neutral. At the same time, we reiterate our Constructive view on gold, supported by the ongoing strength of investment demand and central-bank buying.

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