The Gold and Silver Market
The improving economic outlook for the United States has diminished the appeal of gold to investors. However, weakness in U.S. consumers could still lead the country into recession, which would boost the demand for the precious metal. Meanwhile, Chinese stimulus efforts are expected to support silver demand, according to the latest precious metals report from Heraeus.
The Fed’s View
Earlier this year, a recession was anticipated, leading to expectations that the Federal Reserve would stop hiking interest rates and start cutting them. As a result, the gold price gained as the dollar weakened and bond yields fell. However, the Fed’s view has shifted, and they believe there will not be a recession. Core inflation remains sticky, and the Fed is likely to maintain a ‘higher for longer’ policy on interest rates.
Near-Term Challenges for Gold
In the near term, Heraeus sees the strong U.S. dollar as a significant headwind for gold. The possibility of a further rate rise and the current short positions in foreign exchange futures on the U.S. dollar could further strengthen the dollar and put pressure on the gold price. However, if U.S. consumers falter, a recession could occur, causing the gold price to rebound.
Weakening Areas in the U.S. Economy
Despite positive GDP and employment data, weaknesses can be observed in the manufacturing sector, with the ISM manufacturing PMI remaining below 50. Industrial production also contracted in May, June, and July. Bank lending standards are tightening, and higher interest rates on loans are likely to slow consumer spending. If consumer spending shrinks, a recession becomes almost inevitable, which would result in falling bond yields, interest rate cuts, declining real interest rates, and a weaker dollar, all of which would be positive for gold.
Gold ETF Holdings and Investor Behavior
Gold ETF holdings have continued to decline, with global outflows totaling 1.39 million ounces in August alone. Investors have been liquidating their positions as the gold price fell. Speculation suggests that gold investors may be cautious until they are certain that U.S. interest rates have peaked.
Silver Market and Chinese Stimulus
Silver experienced a nearly 6% rally last week. The weakening Chinese economy is expected to favor demand for the gray metal, as expectations for further stimulus measures grow. Growing cracks in the Chinese housing market are adding to hopes for greater and more impactful measures, particularly in the industrial sector.
Investment Demand for Silver
Silver-backed bullion ETFs have seen global holdings decline by more than 4 million ounces in August. Non-commercial traders have also been unwinding long positions in silver. Despite this, silver and gold investors have moved together in August.