Precious metal prices gained amid growing bets for central banks to commence rate-cut cycles, with gold and silver rising toward the all-time highs seen in May.
Precious metals like gold and silver saw a rebound in July amid growing hopes for major central banks, particularly the US Federal Reserve (Fed), to commence a rate cut soon. Gold futures expiring on 24 August at Comex, rose approximately 3.4%, or $78 per ounce (€72), since its low on 28 June. The price of silver futures contract, expiring on 24 September, surged 8% during the same time frame.
Now gold is roughly 3.6% away from its high, and silver is about 4.7% in distance from its record. The momentum could take them to their all-time highs seen in May, and potentially achieve new records if the trends continue.
Factors that drive the price surge
The weakness of the US dollar is the primary factor driving the price surge in these precious metals. Gold and silver exhibit a negative correlation with the US dollar; their prices tend to rise when the dollar declines, and vice versa. The US dollar index, a measure of the value of the US dollar relative to a basket of foreign currencies, fell by 1% from its recent high on 28 June, as markets anticipated a sooner rate cut by the Fed. This was due to a slew of recently softened US economic data, including an unexpected contraction in the services purchasing managers index (PMI), a loosening labour market, and a slowdown in GDP growth.
In the past two days, Fed Chair Jerome Powell expressed concerns in his testimony before the Senate and the House that moving interest rates too soon or too late might weaken economic growth, and unexpected weakness in the labour market could prompt a cut. These statements increased the odds of a near-term rate cut. According to the FedWatch Tool, the probability of a 25 basis point rate reduction in September increased to 70% from 45% a month ago. Expectations for lower interest rates also mean that the costs of carrying these precious metals are going down, hence supporting spot market prices.
Gold and silver are the best-performing assets of 2024
Year-to-date, gold is up 15%, silver has surged 30%, and the S&P 500 has risen 19%. Gold and silver are seen as haven assets to hedge against all-time high equity markets, as investors believe that central banks in developed countries are likely to enter a rate-cut cycle in the second half of the year. Historically, financial crises have often occurred during intense rate-cut periods, when gold and silver are considered safe destinations to place their funds. Additionally, although inflation appears to have cooled down in most Western countries, consumer prices remain persistently high, making precious metals attractive options for hedging against inflation.
According to the World Gold Council, global ETFs saw inflows for two consecutive months in June, particularly driven by European and Asian buying. This is due to the weakness in these regional currencies, which encouraged investors to buy gold to preserve value. Silver’s surge is likely for similar reasons, as the prices of the two precious metals usually correlate positively, with silver being more volatile than gold due to smaller trading volumes.
Moreover, central banks’ purchases remain one of the primary drivers of gold prices. The World Gold Council’s report shows that central banks added 1,037 tonnes of gold in 2023, following a record high of 1,082 tonnes in 2022. According to the 2024 Central Bank Gold Reserves survey, conducted between February and April this year, 29% of central banks intend to increase gold reserves in the next twelve months.
The potential short-term price driver
As for the short-term trend, the US Consumer Price Index (CPI) is a critical economic indicator for global markets on Friday. Consensus forecasts suggest that inflation may cool further to 3.1% in June from 3.3% in May. Easing inflation will likely continue to fuel optimism for lower interest rates in the second half of the year. This can be a catalyst for precious metal prices to surge further. However, a hotter-than-expected reading tends to impact gold and silver prices negatively.
