Are Precious Metals Holding Up Despite the Odds?

“CPM Group had expected precious metals prices to soften over the summer, and prices did soften, but the weakness was a lot tamer than expected particularly in gold and silver. Precious metal prices showed resilience in the face of traditional headwinds like rising bond yields which were at multi-year highs, a strong U.S. dollar, and typical seasonal weakness in prices. Gold and silver held up best, with platinum and palladium struggling due to certain fundamental supply and demand weaknesses in those two metals at this time. At the end of August, gold, silver, platinum, and palladium prices were 6.6%, 7.4%, 15.2%, and 34.4%, lower than their high for 2023, respectively. It is worth noting that, in the case of gold, the 2023 high was a record.

CPM Group’s forecast was for prices to soften over the summer and strengthen during the last four months of the year. This expectation still is intact, but the increase in prices will now be from a higher base. The fact that gold and silver prices remained at relatively elevated levels despite various headwinds suggests that there is a lot of underlying bullishness in these markets.

Monetary policy tightening that began in 2022 is expected to have a more pronounced negative impact on economic growth over the next few quarters. Economic conditions could be considered somewhat ideal at this time, with inflation having declined and economic growth holding up. But this could begin to change going forward, which should be supportive of gold and silver prices.

There also is the ongoing support for these precious metals as portfolio diversifiers amid cross border political tensions and the U.S. presidential election in 2024. Investors typically are more cautious and there is increased volatility during election years because of the potential changes in policies. Such an environment is expected to be at least supportive of gold and silver prices but could also prove to be positive if there is increased uncertainty about who would win the election. The possibility of another Trump presidency already has many countries on the edge. With no judgment regarding Trump policies they have shown themselves to be disruptive during his last presidency. The first response of most financial markets to disruptive policy changes is to turn risk off, which could be additionally supportive of gold and silver prices. While concerns related to a second Trump presidency are widespread globally, the reality is that both within the United States and around the world many people and governments, perhaps a majority in both instances, are expressing concern over the quality of the entire slate of potential presidential candidates in both parties.

As mentioned before, economic conditions are quite ideal at this time, with a softening in multi-decade high inflation and economic growth holding up despite tighter monetary policy. While economic conditions are on the right track there still are various risks that have a high probability of materializing.

The biggest risk still comes from inflation, where headline inflation has softened rapidly this year, but core inflation has remained sticky. A healthy job market will continue to support core inflation. Furthermore, while higher interest rates have dampened housing market activity it has done little to slow price appreciation. In fact, higher rates have shrunk the pool of sellers which is responsible for worsening housing inventory and pushing housing prices higher. Furthermore, risks to various agricultural products around the world coupled with a restriction on crude oil supply by Saudi Arabia and Russia risks providing support or even driving headline inflation higher.

The presence of these factors has led central banks to keep their options open regarding further monetary policy tightening. Central banks at this time seem to have more of a cautious rather than a hawkish stance. Monetary policy is unlikely to be loosened anytime soon. Lowering core inflation is important to central banks. Market expectations, based on the CME FedWatch tool, that the first interest rate cut will occur in May 2024 is likely to be too optimistic. The Fed would like to see that core inflation is headed in the right direction and that the slowing of core inflation can be sustained. Given the various risks to inflation both headline and core, policy is likely to be kept restrictive for an extended period of time. The longer policy remains restrictive the greater the probability that something breaks economically.”