StoneX Bullion Report

Gold is showing some signs of life, now back to $1,972.5 per ounce, having dipped under $1,900 per ounce in mid-August. Recent strength was based largely on weaker than expected US employment data (with the Non Farm Payroll, due on Friday this week), weakening consumer confidence and slowing first quarter US GDP, decelerating to just a 1.1% annual pace.

Anticipation that official rates have peaked, given slowing activity, is the basis for recent precious metals strength – but it’s not yet cut and dried. Investor activity has been mixed, but potentially points to fresh price gains for gold and silver.

While the first half of August saw gold under pressure from a strengthening dollar and rising bond yields, the latter days of the month have seen this situation reversed.  Initially as gold fell below $1,900 markets were cautious about possible further weakness, but bargain hunters stepped in. We have now unwound more than half of the price losses sustained since the recent peak in late July.

Gold price and the US Dollar

Source: Bloomberg, StoneX

Better times ahead?

There are some signs that the gold and silver markets are consolidating, as we suggested a fortnight ago, and this is helped by a strengthening technical construction on the chart for each metal.  While gold is still pretty much friendless amongst investors in ETPs and on COMEX, silver has started to turn round on the Exchange. This often presages an upward move in gold.  Gold has been encountering continued long liquidation, and fresh shorts on the exchange; silver, after quite a torrid time, is now seeing fresh buying interest, and some short covering. 

This does not guarantee a positive turning point for gold, but it is not unusual for a change in trend to begin with silver and then to be followed by gold.  Silver is a smaller market than gold, with higher price volatility, and it will often be the first precious metal to attract speculators. Investment positions in gold, bullish or bearish, can be given extra gearing by an accompanying position in silver. Overall, we feel that there is some sign of resilience developing in the gold price.

Gold/silver price ratio

Source: Bloomberg, StoneX

Economic data supportive for Gold

While this recovery could be thwarted by renewed strength in US economic data in the next few months, in the immediate future underlying economic trends appear to be supportive.  The economy is slowing; the labor market is cooling; wage inflation is coming down; consumer confidence is weaker; and the housing market is slowing. All eyes on the Fed.  The next FOMC meeting is due on September 19-20 and will include the Special Economic Projections and the Committee Members’ dot plot (projecting the Fed funds target rate at year-end, at the end of 2024 and beyond).

It will not surprise anyone that Jay Powell kept room for manoeuvre firmly on the table when he addressed the recent Jackson Hole symposium.  He supported the notion that the Fed’s actions have combined with the unwinding of the pandemic legacy to bring inflation down; but he emphasized that there is still a long way to go (and we have certainly heard that before).  Noting that the Fed is positioned to proceed carefully suggests that next month’s FOMC Meeting may not play host to another rate hike, and the Fed Funds markets responded accordingly.

Possibly the key is in his words “We see the current stance of policy as restrictive, putting downward pressure on economic activity, hiring and inflation”.  This suggests that Fed Funds have peaked, while leaving him some leeway to act if economic data requires it. The markets’ view on interest rates, expressed in the CME Fedwatch tool, now places a 10% probability that rates will go up again, with rate cuts projected early in 2024. This should be supportive for the gold and silver price.

Taken from analysis by Rhona O’Connell, Head of Commodity Market Analysis for EMEA & Asia, StoneX Financial Ltd.

Contact: Rhona.Oconnell@stonex.com.