What are the medium and long-term expectations for precious metals?

“Various markets began to decline following the most recent Federal Open Market Committee (FOMC) meeting, in late September. The Summary of Economic Projections report, released after the meeting provided the clearest signal yet to the markets that the Fed was serious about keeping rates higher for longer. The Fed has been saying this verbally for a long time, but an upward revision to the federal funds rate projections coupled with an increase in economic growth projections seemed to have had a stronger impact. U.S. economic data releases since the last FOMC meeting also have been generally supportive of the Fed’s view.

Meanwhile, Europe seems to be struggling with growth, raising questions about whether the European Central Bank will be able to raise rates any further. The European situation juxtaposed with that in the U.S. has pushed the dollar to its highest level against the euro since the first week of December 2022. On a trade-weighted basis the dollar rose to its highest level since the end of November 2022. U.S. 10-year and 2-year government bonds were at their highest levels since the Great Recession and while the spread between these two bonds remains negative, that spread has more than halved compared to as recently as the end of July, reflecting an improved sentiment toward U.S. economic growth.

All of these factors collectively resulted in markets adjusting their expectations, which in the case of precious metals meant weakness. Gold, which had been the best performing exchange traded precious metal during the first three quarters of this year, took a particularly strong hit initially. A confluence of various technical supports being broken resulted in gold prices falling around $100 between the FOMC meeting on 20 September and the end of that month. That weakness continued into the first few trading days of October as well.

Other precious metals also softened, but the weakness in these precious metals was less pronounced initially, although they accelerated in the first trading days of October. The initial reaction in these other precious metals may have been less pronounced at least in part because of their relatively lackluster performance compared to gold prior to September but also in part because the healthy economic conditions, which caused the Fed to raise its economic growth forecast for the next couple of years as well as keep its rates higher for longer. The idea of
stronger economic activities is more positive for precious metals like silver, platinum, and palladium, which have various industrial uses. The ongoing strength in the U.S. dollar and government bond yields eventually pressured these metals sufficiently to crack below some of their key support levels at the start of October.

While precious metals prices are struggling at the time of writing this report, fundamentally these markets, particularly gold and silver, remain strong. And, while market sentiments have shifted toward a more sanguine economic outlook, underlying economic and political trends could turn more hostile in the next few months, and financial market sentiments could swing back toward greater interest in risk protection in precious metals. There still are various reasons to continue adding the metals to one’s investment portfolio as a diversifier. The current weakness in prices provides a good buying opportunity.”