Gold enters the final month of the year trying to hold onto the significant gains the precious metal achieved in November. The price climbed by $100 an ounce on the prospect of the Federal Reserve being less aggressive with its upcoming interest rate decisions.
Upcoming December rate move
As has been the case for the bulk of the year, all eyes will be on the US central bank with gold investors’ festive cheer depending on the outcome of the Fed’s interest rate decision on December 14th. The hope is that after a series of 75 basis point increases, December’s meeting will bring a slightly softer 50 basis point hike and be the first step on the road to further increases petering out in the early part of 2023.
By the time the Fed’s rate decision comes in the middle of the month, the bank officials will have a few more pieces of the economic jigsaw puzzle with the latest jobs and unemployment data at the start of the month, following the US inflation figure for November the day before the FOMC meeting.
Positive numbers that show a resilient jobs market and inflation on a downward trajectory will give the Fed more breathing space to reduce the aggression of their hikes while any negative surprises are likely to spook markets that remain highly jittery.
Gold Price Performance
Gold has been hostage to the actions and words of the Fed and its officials with the precious metal’s price struggling under the weight of the US central bank’s series of significant rate hikes over the second half of 2022. Gold’s lack of yield has made it vulnerable during this period of rising interest rates and offset any potential gains the precious metal may otherwise have benefited from, given the highly inflationary environment as well as the ongoing war in Ukraine.
While the macroeconomic picture has kept a cap on the gold price, the metal hasn’t been without support, with any significant dips in the price prompting fresh purchasing waves from Asian buyers in particular, with no sign of this trend disappearing any time soon.
Crypto – a fresh driver
In a year in which the Fed has been the dominant factor, November did bring a fresh driver into the mix with the collapse of crypto giant FTX. The huge losses endured by those companies and individuals exposed to the bankruptcy of the cryptocurrency firm prompted significant flows into gold, with investors seeking a haven in gold that has proven a store of value throughout the bursting of numerous stock market bubbles.
Where does all this leave gold? The gains in the early part of November point to an investor mindset keen to support gold but still lacking the ideal macroeconomic conditions. With another hike expected by the Fed in December, it is hard to see gold making significant gains, but equally, the price looks to have built up a strong floor.
As such, a stabilisation above $1,700 an ounce looks the likeliest outcome with gold priming itself for a stronger 2023 as and when the Fed’s much-anticipated pivot finally materialises.
After a promising start to November, which saw the silver price climb from $19 an ounce to above $22 an ounce, the second half of the month disappointed those investors hoping to see silver continue on its upward trend with the price instead consolidating around $21 an ounce.
Why is silver so undervalued?
Global demand for silver is set to increase by 16% to 1.2 billion ounces, according to Metals Focus, leading to the largest supply deficit in decades with a shortfall of 194 million ounces, a scenario that is likely to continue well into 2023.
Entering the energy transition
A thirst for silver for photovoltaics as well as in batteries has made the metal far better placed than its precious peers (gold, platinum and palladium) to benefit from the global drive towards net zero and the electrification of transport and power.
As well as a buoyant industrial outlook, Indian demand has surged on the back of weaker rupee prices for silver with buyers willing to pay a premium to have their metal flown in from the vaults in Europe rather than shipped.
Yet despite all these bullish factors from the demand side, silver enters the final month of the year still way off its high for the year in March. This underlines how prone to the broader macroeconomic conditions silver is, rather than purely the metal’s fundamental supply and demand balance.
With the Federal Reserve expected to implement another interest rate hike in the middle of December, albeit at a slightly smaller increase than in previous months, silver has found itself less attractive than other asset classes that provide a yield.
Furthermore, continued lockdowns in China may dent economic growth in one of the key industrial hubs, while Europe looks set for a recession in 2023 as the continent battles with persistently high inflation.
Yet despite these negative factors, the fact remains that silver is a metal in record demand and one whose fortunes look ideally placed for the energy transition that will dominate the agenda for years to come. So after the late November period of consolidation, silver once again looks hugely undervalued and ripe for buying in December.
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.