Gold Outlook – June 2022
Gold starts June on a firmer footing with markets having stabilised after the brutal mid-May sell-off on equities that managed to bring the price of gold down with it. Having briefly dipped below $1,800 an ounce in May, the precious metal has recovered to trade in a range of $1,840 to $1,860 an ounce.
All eyes will be on the Federal Reserve come June 15th when the central bank will announce its latest interest decision. Another hike of 50 basis points seems to be all but guaranteed as the Fed continues its course of tightening monetary policy to try and bring inflation back under control.
Minutes recently released from the Federal Open Market Committee provided the following nugget: “Most participants judged that 50 basis point increases in the target range would likely be appropriate at the next couple of meetings.” Therefore any move in June that fails to match these expectations would trigger a volatile market reaction.
Gold Confronts Market Headwinds
The prospect of rising interest rates over the coming months has been the major headwind for gold that doesn’t bear a yield, with interest-paying assets such as bonds, or yield-bearing digital gold, more attractive instead. However, while interest rates are certain to rise on both sides of the Atlantic with the Bank of England likely to increase its benchmark rate by a further 25 basis points in June and the European Central Bank set to have a positive interest rate come July, the potential trajectory of these rate rises is looking less severe than they did a few weeks ago. This is due to concerns that too aggressive an approach to tackle inflation could instead lead to stagflation, where inflation remains high and economic growth slows.
These moves by central banks across the world are also key in determining the relative strength or weakness of that country’s currency. A significant factor in gold’s recovery at the end of May was the tailing off in the strength of the US dollar, which the global reference price for gold is priced in.
As a result, any speeches or comments by Federal Reserve officials will be closely scrutinised by investors and traders keen to gain a better insight into the central bank’s likely actions. The market reaction to these comments then becomes a judgement call on whether the Fed is taking the “right” approach as it juggles the continued growth of the world’s largest economy with ensuring inflation doesn’t significantly erode the buying power of US consumers.
Will inflation reach its peak?
June should hopefully provide indicators that inflation has peaked, particularly in the US, and that the current course of action can be maintained. In this environment, gold can be expected to continue in its current range of $1,840-$1,860 an ounce until a fresh driver arrives.
Sadly, one area where this fresh catalyst may come from, is Ukraine. While the war is no longer driving markets in the same way it did in late February and early March, the conflict continues to rumble on, destroying thousands of lives and livelihoods of the Ukrainian people in the process. For the time being, the battle looks to have concentrated on Ukraine’s eastern border with Russia seeking to place the Luhansk province under its control.
Any sign of Russia’s invasion breaking out of its current parameters could spark a fresh rush to safety, to the benefit of gold, while in the unlikely event of a peaceful solution being achieved in June then gold’s price may fall with the fear element currently factored into it being fully unwound.
Will Silver Recover Territory After Sell-Off?
Silver investors are able to look forward to June with optimism after the month-long slide finally ended in mid-May. With the price having plunged from close to $26 an ounce in mid-April to below $21 an ounce, it has since recovered to be back above $22 an ounce.
A weakening of the US dollar, which silver is priced in, allied to a readjustment of market values after the brutal sell-off left some unduly cheap assets helped silver regain some of its lost territory.
The words and actions of the Federal Reserve are the primary drivers of markets currently with signs that the US central bank may not have to implement as many or as severe a series of interest rate hikes as originally anticipated. June is set to bring confirmation of the Fed’s second consecutive 50 basis point increase in its benchmark rates but with this now firmly priced in, it would take a move that surprises expectations to materially move the dial on market prices.
Haven Demand Remains
Now traders and investors are finally able to pause to breathe after a dramatic May, silver is one asset that continues to look underpriced even after the slight readjustment at the end of the month.
While a hawkish Fed continues to present a considerable headwind, the other factors remain supportive. Silver is considered a good hedge against inflation and can benefit from haven demand amid jittery markets and an uncertain growth outlook, while the industrial use of the metal in key sectors such as technology and solar energy presents a strong case for further gains yet.
Considering the demand for silver is on track for another record year, a return to the levels seen in mid-April when it was closing in on $26 an ounce still looks within reach.
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.
