Gold closed down 0.2% last week but not before a new 13-month high was attained at $2048.79. A corrective tone persisted early in the new week amid speculation that the Fed will hike rates again in May, even as inflation continues to slow.
Both CPI and PPI came in below expectations in March. PPI posted its biggest monthly decline since April 2020. With inflation concerns waning, so too does a significant bullish catalyst.
Nonetheless, there is a growing expectation that the Fed will hike interest rates at the May FOMC meeting. Based on the CME’s FedWatch tool, the probability of a 25-bps hike now stands at 91%, that’s up from 72.2% last week and 20.7% a month ago.
Assuming the Fed does indeed tighten in May to the 5.00-5.25% range, the market believes they will hold steady in June. There is however an 18% probability of another 25-bps high in June.
Keep an eye on EU and UK inflation data this week. Hot numbers would likely prompt the respective central banks to maintain their bias toward tighter policy with the potential to further narrow interest rate differentials.
Providing some additional weight on gold is the fact that the dollar held a significant support level. The low from February 2 in the dollar index at 100.82 was ever-so-slightly exceeded on Friday last week but may be considered technically intact.
While the subsequent rally hasn’t been terribly impressive, a case can be made for a potential double-bottom. The confirmation point for that pattern is the 105.88 high from March 8, which is not in any immediate jeopardy.
The dollar has pressured its 20-day SMA already and penetration would clear the way for additional gains toward the 103.50 zone, where the 100 and, 200-day SMAs converge with the 50% retracement level of the latest leg down.
Such gains in the greenback would likely keep the pressure on gold. Short-term potential is back to the $1959 level, but such a move would be seen as corrective. My sense is that there are quite a few interested buyers feeling the market got away from them.
While there are reports that the recent higher prices have tamped Asian demand, I still believe there is potential for a near-term challenge of the all-time high at $2075.14.
Global gold ETF inflows were 164,805 ounces last week. It was the fifth consecutive weekly inflow, but holdings are still 0.3% lower YTD. We’ll be watching closely to see if more buyers come in on the break or if the recent longs are weak.
Silver gained 1.6% last week, it was the fifth consecutive high weekly close for the white metal, which probed above $26 for the first time since April of last year.
A softer tone prevailed on Friday into Monday, taking out nearby trendline support. Scope is seen for additional short-term losses back to the 20-day SMA at $24.25. Secondary support is marked by the 38.2% retracement level of the recent leg higher at $23.72.
The IMF now forecasts global growth of 2.8% in 2023, down from 3.4% in 2022. They believe China and India will account for more than half of that growth.
The IMF then sees the global economy averaging around 3% growth over the next 5 years. That’s well below the 3.8% average that was achieved in the previous 20 years.
That outlook doesn’t bode terribly well for industrial metals, and yet I suspect much of the growth that is realized will be driven by technology and the strong trend toward electrification. Silver should fare well in such an environment, even if the overall pace of global growth is weak.
Last week the Biden administration announced a plan to significantly increase vehicle emission standards beginning with the 2027 model year, projecting that 2/3rds of all vehicles sold in the U.S. would be EVs by 2032. That’s less than 10 years from now!
Whether such lofty goals are even remotely feasible remains to be seen, but it does seem likely that EVs will continue to gain market share. On average, EVs contain about 44% more silver and 2.5 times more copper than conventional vehicles.
Platinum posted a 4% gain last week, notching a fifth consecutive higher weekly close. While gold and silver were defensive to start the week, both platinum and palladium displayed some buoyancy on Monday.
While platinum remains well within its range, the recent strength seems to defy the tepid global growth prospects and the Biden administration’s push to get rid of most vehicles powered by internal combustion engines.
Fewer ICE vehicles will ultimately result in diminished demand for auto catalysts. However, the market may have latched on to the expectation that emission standards will continue to be more stringent in the intervening years, requiring greater PGM loading.
Palladium has rallied about 18% since the $1329.18 low was set on March 9. A move above the 100-day SMA at $1612.66 would suggest potential back to $2000.
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