Gold Outlook
Gold enters September on a dreadful run after August’s drop made it five monthly declines in a row, the precious metal’s worst performance in four years.
As such, gold starts a new month trading close to $1,700 an ounce having traded above $1,800 an ounce just a few weeks ago.
A hawkish reminder at Jackson Hole
This reversal in fortunes followed a series of hawkish statements by Federal Reserve officials, culminating in Chair Jerome Powell’s stark message at Jackson Hole that to get inflation back under control, the US central bank will need to raise interest rates higher yet and keep them there for a sustained period.
This brought a reality shock to the mid-August markets that were falsely clinging to healthy US economic data as reasons why the Fed wouldn’t have to keep its aggressive monetary policy up for as long as initially feared.
This picture for gold showcases that its price action is dictated by the actions of the Federal Reserve and any comments by bank officials are unlikely to materially alter in September.
Indeed the monthly cycle which brings key economic data such as jobs figures and the latest inflation readings and builds towards the Fed’s interest decision on September 21st is set to once again produce potentially optimistic data, particularly in the US. However, this time around, investors are likely to be far more cautious in reading too much into any of these after Powell’s hawkish speech.
More interest rate hikes in store
Another sizeable interest rate hike is anticipated by the Fed, with current forecasts pointing to another 75-basis point increase. A few months ago, such a large move was relatively unchartered territory.
Now, markets are used to the prospect of central banks worldwide implementing significant rate hikes as they try to bring runaway inflation, which remains in double-digit territory in numerous countries, back under a semblance of control.
Against this backdrop, it is hard to see how gold can make significant gains and on the face of it, a sixth monthly decline looks the likeliest outcome. However, the strands of optimism that gold investors can cling to are the positive reaction when the gold price dipped below $1,700 in July which saw buyers pile in and quickly push the price significantly above that threshold. In addition, the reality is that a global recession remains a very real prospect and Ukraine is still sadly very much at war with Russia.
The latter two elements feed into the strength of support that gold benefitted from the price dipping below $1,700 and perhaps point to the metal’s current price equilibrium lying around that level.
Silver Outlook
The optimism that was building up for silver investors at one point in August with the metal holding above $20 an ounce for a period of time and pointing to the lows of July being the bottom of the market has been well and truly dashed, with silver starting September below $18 an ounce.
The reason for silver now trading at its lowest level in more than two years is the stark messaging by Federal Reserve officials, notably the Chair, Jerome Powell, that dashed any hopes of a soft landing with interest rate rises.
Although recent economic data out of the US has pointed to a country so far not showing any sign of damage from persistently high inflation that may now have peaked, the Fed’s reality check reminded markets that inflation remains way above the bank’s 2% target and so plenty more interest rate rises are in store.
Only time will tell the strength of support
Given physical silver’s lack of yield, the prospect of ever-rising interest rates makes the precious metal less attractive compared to other interest-paying assets, such as bonds. In contrast, Kinesis’ digitalised silver currency, KAG, does provide users with a monthly yield for spending and trading.
How strongly silver reacts to its dip below $18 an ounce will be crucial in determining the strength of support that remains for the metal. The fundamental picture remains promising with the metal a key component of two burgeoning industries in solar energy and electric vehicles and points to the current price looking way under its true value.
While a recovery back above $18 an ounce is likely, silver’s potential to make significant gains are likely to be capped by the strength of the Fed’s aggressive monetary policy with another 75 basis point rise on the cards in September.
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.
