Our base case remains that safe-haven demand should fade further, assuming that the US economy does not slip into recession. The bull case remains a recession as it should lead to a significant pick-up in safe-haven demand. Meanwhile, silver should continue to move in gold’s slipstream.
It seems as though gold and silver have jumped on a rollercoaster. In early July, prices faced very strong pressure and were at the risk of a vicious selling circle, triggered by a strengthening US dollar, rising real US bond yields and a rapidly deteriorating market mood. What saved the markets from this vicious circle and eventually led to a rebound was US Federal Reserve chairman Jerome Powell pointing to a slower pace of interest rate hikes in the future.
As a result of that, the US dollar and real US bond yields rolled over, which lifted the market mood and thus gold and silver prices. That said, during the past few days this rebound has already run into resistance as it was lacking the support from safe-haven seekers.
Holdings of physically backed gold products, our preferred gauge of safe-haven demand, instead continued to record outflows during the past few days and weeks. These outflows are primarily concentrated in US- and UK-listed products, while holdings of products listed in Switzerland and Germany are more or less unchanged.
Given the severity of the energy crisis in Europe, this seems somewhat surprising, especially in the case of Germany. The recently-released minutes of the latest Federal Reserve meeting confirmed that US interest rates will remain higher for longer in order to contain inflation. This provided some support to the US dollar and real US bond yields, thus weighing on gold and silver prices.
All in all, our view on gold and silver has not changed. Our base case remains, assuming that the US Federal Reserve will fight inflation successfully without pushing the US economy into recession, that safe-haven demand will fade further and that prices will move gradually lower on a medium to longer-term horizon.
The bull case remains a recession as this should lure safe-haven seekers back into the market, not least as real US bond yields are likely to fall further. Meanwhile, silver’s underperformance very much mirrors rising recession risks due to its primarily industrial applications. While the cyclical cooling somewhat weighs on industrial demand, we believe most of the price volatility is actually related to swings in the market mood, which tend to be very pronounced for silver. On a medium- to longer-term horizon, silver should continue to move in gold’s slipstream.
(The author is Head Next Generation Research, Julius Baer)
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