Precious metals - Outshined by the Fed

Precious metals have been hit hard by an ever hawkish Fed, high interest rates and a strong US dollar.

Gold is mostly driven by investment demand, which in turn depends on the attractiveness of gold as a hedge against a decline in US dollar value, against high inflation and against general economic uncertainties. Investment demand is also significantly impacted by the opportunity cost of holding non-yielding gold.

In the short term, US job and inflation data for June are definitively not favouring a softer Fed monetary stance, which should keep gold under pressure. But our central scenario suggests that the Fed could turn more cautious on rates in September. That would also coincide with a seasonal surge in jewellery demand in the fourth quarter, setting the stage for a more supportive environment for gold.

Overall, we have decided to lower our three-month projection at USD1,750 per troy ounce (vs. USD1,780) to take into account the recent change in projections for the US dollar and the risk that the Fed remains hawkish longer than previously thought.

The short-term concerns we have on investment demand for gold are also present for silver, with the difference that the decline in investment demand is much more visible in the white metal. To be fair, we think that the shift towards green energy is likely to boost industrial demand for silver, given its usage in electric battery and solar panels. Comparing gold and silver prices, silver looks cheap relative to gold based on past history. Overall, in the longer term, we see scope for silver outperforming gold.

The high uncertainty linked to Russian supply (which represents roughly 40% of total supply) should keep palladium particularly volatile. In the longer term, the prospect of declining Russian supply as mining activities may ultimately be affected by economic sanctions could weigh on global supply.

Similar to palladium, platinum is likely to benefit from improving automotive demand. That said, platinum demand is more diversified than palladium, as, for example, jewellery demand represents a significant share of total platinum demand (roughly 25%). 

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