The US Federal Reserve raised interest rates by 0.75 percentage points on Wednesday while pointing out the potential for further future moves of a similar size to fight inflation. The gold and silver markets showed some nervousness in the aftermath of the announcement as they digested the news flow of the press conference, but they ultimately ended the day slightly up.
That said, prices remain in their recent ranges, underpinning that the markets are still tossed and torn between the inflation issue and the related tightening of monetary policy by the world’s central banks – most notably by the US Federal Reserve.
Leaving aside the short-term volatility that we are currently observing in the gold and silver markets, we believe it is important not to lose sight of their established long-term structures.
Firstly, gold and silver’s relationship with inflation goes well beyond the consumer price index. Much more important are forward-looking gauges of inflation expectations and the related real US bond yields. In contrast to the headline-hitting consumer price index, market-based inflation expectations have not skyrocketed. In fact, they have been trailing the move of nominal bond yields, which means that real bond yields have risen well above the zero line during the past few weeks. In our view, this shows that inflation uncertainty, at least on a long-term horizon, remains contained. This has kept gold and silver prices in check, as they typically benefit from high inflation uncertainty.
Secondly, metals and the US dollar typically move in opposite directions. As the dollar itself is a safe-haven asset in times of crisis, and as the US Federal Reserve has been most aggressive in tightening monetary policy, this has likewise kept prices in check.
Thirdly, investment demand remains the dominant driver of prices. The holdings of physically backed products (our preferred gauge of safe-haven demand) have hardly moved for gold in recent weeks, while they have fallen quite strongly for silver. Put differently, safe-haven seekers have been absent from the markets despite rapidly rising inflation, signalling confidence that the inflation issue is not getting out of control. Taking all this together, we believe the fundamental backdrop for gold and silver remains unchanged.
Assuming that the US Federal Reserve will tighten monetary policy and successfully fight inflation without pushing the US into a recession, safe-haven demand is set to fade further. This should lead prices somewhat lower in the medium to longer term, while in the short term, they are still supported by prevailing economic and political uncertainties.
(The author is Head Next Generation Research, Julius Baer)