Gold enters August having after enjoyed a positive July in which the precious metal confounded the negative macro environment it looked to be having to endure by achieving a monthly gain and holding above $1,950 an ounce.
Investors switching focus
The main question now being asked by investors is how much longer can gold continue to trade at such elevated levels. The end of July brought confirmation of further interest rate hikes by both the Federal Reserve and the European Central Bank with August set to kick off with increases by the Reserve Bank of Australia and the Bank of England. Yet despite this seemingly bearish environment for gold, with rising interest rates typically proving a drag on gold prices given the physical metal’s lack of yield, investors have switched their focus once again to the prospect of global interest rates having now peaked or being very close to their peak.
Gold under threat?
The danger for gold is that it is this same medium-term view that kept gold buoyant throughout July so this peak interest trade has long since been priced in. As such, any comment from a Fed official or data point that suggests that interest rates may need to rise further yet could spark a sharp reversal in gold’s fortunes.
The other bearish factor for gold as we head towards the European holiday season where traders head to the beach and away from markets is that confidence is slowly starting to return to equities. The latest economic data suggests that European economies are still just about growing and are so far proving resilient to the dual threats of first stubbornly high inflation and then the rising interest rates implemented to curb the former.
If this trend continues and the global economy is indeed looking in decent health, then money will start to flow away from the safe haven that gold offers and more into riskier assets.
The latest data
As well as this week’s aforementioned interest rate announcements, other key data points for the August calendar include the latest US inflation data on August 10th, which is expected to fall ever closer to the Fed’s 2% target. If this proves accurate then that would increase the likelihood of the Fed being able to pause on any further hikes and therefore be a boost for gold. However, the flipside of that would be with the dark clouds of inflation finally clearing, equities markets can enjoy sunnier times and further increase risk appetite among traders.
Taken all factors into consideration, August looks more likely to deliver a monthly drop for gold rather than a continuation of July’s gains. Indeed, if gold remains above $1,900 an ounce come the end of August it would be further indication of how uncertain traders and investors will still be about the true health of the global economy.
Silver in August
Silver looks set for a strong August and continue build on the gains made in July now that investors’ attention has finally dialled in on the metal’s outstanding fundamental case.
After languishing around $23 an ounce without a clear direction at the start of July, the silver price was sparked into life in the second half of the month and now heads into August closing in on $25 an ounce. The fact that these gains have been achieved despite the Federal Reserve implementing another interest rate hike at the end of July underlines the strength of support that silver has built up.
The Fed’s aggressive stance on inflation that has seen the US central bank implement a series of interest rate hikes for over a year looks finally to be drawing to a close, with July’s hike potentially the last of the current cycle. Given that the Fed’s hawkish policy was the single biggest factor in silver’s multi-month slump last year and a continued drag on the metal’s attempts to recover from those lows, the prospect of no more interest rate hikes is positive for silver.
The reason the Fed, and other central banks, are contemplating stopping any further hikes is that stubbornly high inflation is finally showing signs of being under control with the US figure in particular falling closer to the Fed’s 2% target. While silver is sometimes viewed as an inflation hedge, the detrimental impact of high inflation for sustained period on the global economy would have crimped into the metal’s industrial demand outlook.
Silver’s long-term prospect looks very robust with the metal’s excellent conductivity making it an essential component of the energy transition that will require a huge increase in electrical output. Yet while the metal has been in a supply deficit for a number of years and is set to be so again this year and indeed for the foreseeable future, this outstanding fundamental case has been overpowered by the negative macroeconomic environment. Now that the environment looks far more supportive, there is significant potential for considerable gains for silver with the first target being the high of this year just above $26, a level that could be challenged in August.
After a difficult period for silver, the metal now looks set for a sustained rally with the question not whether it will continue rising but more how high it can rise.
Rupert is a Market Analyst for Kinesis Money, responsible for updating the community with insights and analysis on the gold and silver markets. He brings with him a breadth of experience in writing about energy and commodities having worked as an oil markets reporter and then precious metals reporter during the seven years he worked at Bloomberg News.
As well as market analysis, Rupert writes longer-form thought leadership pieces on topics ranging from carbon markets, the growth of renewable energy and the challenges of avoiding greenwash while investing sustainably.
This publication is for informational purposes only and is not intended to be a solicitation, offering or recommendation of any security, commodity, derivative, investment management service or advisory service and is not commodity trading advice. This publication does not intend to provide investment, tax or legal advice on either a general or specific basis.