May 2022 – A Look Ahead
Confirmation of the Federal Reserve’s interest rate hike, its most aggressive since 2000, has set the tone for investors in May. With inflation proving far from “transitory”, central banks in the US and Europe are being forced to adopt hawkish monetary policies to bring rising consumer prices back under control.
Although gold’s initial price reaction to the Fed’s 50 basis point increase saw the precious metal climb back above $1,900 an ounce, the medium-term outlook is far more challenging.
The Fed’s May hike was followed by the Bank of England implementing its fourth consecutive monthly hike, pushing the base rate to its highest level in 13 years. These increases are likely to be followed by further hikes by the Fed in both June and July while the European Central Bank is expected to finally increase its rate in July.
In this environment, the appeal of holding gold wanes as its lack of yield makes other interest-generating assets such as bonds more attractive to investors.
Gold Price Pushes Above $2,000 per Ounce
However while the war in Ukraine shows no sign of finding a peaceful resolution, some of that fear-induced trading triggered by Russia’s initial attacks on its neighbour has been unwound. As such, the price of gold has drifted steadily downward from its early March peak to drop below $1,900 an ounce by the end of April.
Inflation Fears for Many
With inflation the main worry for investors, all eyes will be on the latest US data when it is released on Wednesday, May 11th followed by the UK’s figure a week later on May 18th while the end of the month will give the first glimpses into which direction consumer prices are heading in the major European economies.
While the recent moves by the Federal Reserve and Bank of England won’t have any impact on the April rate of inflation, the hope is that these prints represent the high point as the increasing interest rates succeed in curbing rising prices.
So dominant has this theme become that any utterances by central bank members will be closely analyzed to divine any hints on the pace and severity of the reduction of balance sheets and trajectory of interest rates.
The jittery nature of markets currently is likely to mean that any comment deemed more hawkish or dovish than anticipated triggers a fresh wave of volatility. Gold will not be immune from these jitters but any moves are likely to be less dramatic than those seen on equities.
Gold Under Pressure – Central Bank Action
It is worth noting that gold has found itself coming under considerable pressure due to the actions of central banks to try and curb inflation yet gold is typically viewed as a great hedge against inflation as an asset that has held its relative value over centuries.
So while for the time being, inflation is having a negative impact on the price of gold, the current downward trend may soon spark buying interest from investors perceiving the precious metal as undervalued and a better choice of asset to hold than growth stocks in falling markets.
Piecing all these factors together, while gold may not see huge gains in May unless there is a dramatic escalation in the war in Ukraine, the downward drift is likely to be curtailed soon with fair value in the range of $1,840-$1,870 an ounce.
Silver Outlook – May 2022
Silver endured a tough end to April, slumping from comfortably above $25 an ounce to below $23 an ounce to levels not seen since early February. And this slide has continued into May with the metal trading a little above $22 an ounce following the sharp reversal in the market reaction to the Federal Reserve’s largest interest hike since 2000.
Currently, investors seem to be finding each macroeconomic news indicator as a reason to mete out fresh punishment for silver. Yet a quick zoom out of the short-term, daily drivers paints a much more optimistic outlook for the metal.
Fed Interest Hikes Expected
Clearly, the likelihood of further interest rate rises by the Fed presents a considerable headwind to a non-yield bearing asset like silver, yet the other factors all point to reasons to be optimistic. While rising consumer prices are causing headaches for central banks and governments, silver is viewed as a good hedge against inflation. Add in the fact that markets remain on edge as long as Russia is attacking Ukraine and it points to silver’s appeal as a haven asset.
Then throw in the strong fundamental case for silver with industrial demand on course to record a new high this year, driven by its key role in the photovoltaic cells for solar panels as countries seek to move away from fossil fuel dependence, and it’s hard to understand why silver finds itself languishing at such lowly levels.
For now, the Fed’s actions are overriding any other potential driver but the moment other factors are given a look in, then investors will surely give silver a fresh, more positive appraisal.
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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.