Gold in October
Gold investors will be hoping that the worst is now behind them after seeing the price of gold trend steadily down from above $2,000 an ounce as recently as March to barely above $1,600 an ounce during September.
Inflation is why central banks worldwide are hiking rates, with consumer prices rising much faster than the banks’ target of about 2%. Indeed, inflation has proven stubbornly high, far off the transitory shock regarded at last year’s end. While gold has historically been seen as a hedge against inflation having retained its relative buying power over centuries, the impact of fast-rising interest rates has more than outweighed any potential price benefit that gold might have gained in previous highly inflationary periods, viewed through a dollar lens at least.
It is worth noting that while gold’s performance in dollar terms has underwhelmed in recent times on the back of the strength of the greenback, gold has performed much better in other currencies, notably in pound sterling terms for example. Gold has also held its relative value against West Texas Intermediate oil, even with the volatility oil has experienced this year.
Rising Geopolitical Tensions
Away from macroeconomic policy, where central banks face the tricky task of balancing the need for rate hikes to curb inflation, the ongoing war in Ukraine is a potential wildcard that could impact the price of gold and global markets more widely.
The success of Ukraine’s counterattack in September has raised the prospect of an increasingly desperate Russia further escalating the scale of the conflict. Such an event would raise geopolitical fears, with gold a likely beneficiary of a risk-off market environment, with the precious metal proven as the ultimate safe-haven asset that has endured through centuries of wars.
Taking all these things into account, gold is more likely to go down rather than up in October with no sign of the pressure being applied by central banks will ease. Given the losses that have seen the precious metal sink to its lowest levels in more than two years, the hope will be that the Ukrainian war has created sufficient haven demand for $1,600 an ounce to be stable support around which the price can stabilise.
Support Despite Hawkish Environment
Hawkish central banks are making all non-yield bearing assets, including silver, less attractive. While silver has undoubtedly been losing ground in the macroeconomic environment, shedding $8 an ounce from its March highs, the long-term fundamental demand for the metal has seen investors buy recent dips in the price and keep it supported around the $18-$19 an ounce mark.
This scenario could well continue into October when hawkish speeches by central bankers and further interest rate hikes cause the price of silver to dip initially, only for the price to recover ground as value-seeking investors flood in.
Demand Forecasted to Climb
While the focus is very much on a short-term outlook in which persistently high inflation needs to be tackled to protect consumers from ever-faster price rises, the longer-term view in which governments and companies across the world need to progress in their net zero commitments is far rosier. Silver has a key role to play in the energy transition with its use in photovoltaics in the solar industry and the batteries of electric vehicles; demand is forecast to climb consistently as a result.
Investors willing to look to the horizon see a metal that is way below its fair value. While rising interest rates make it hard to see silver making huge gains, it is equally hard to see the price going significantly lower.
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.