Gold is maintaining a corrective tone after dropping to a 14-week low of 1910.21 last week. The yellow metal has been weighed by mounting expectations that the Fed will hike the Fed funds rate by another 25 bps when they meet this week.
Fed funds futures are currently showing that probability at 74.4%. That’s up from 52.2% a month ago and a very low probability right after the May FOMC meeting. While inflation has continued to moderate, it remains well above the Fed’s 2% target.
Meanwhile, the labor market and economic growth remain at least marginally resilient. The FOMC indicated in May that policy moves would be data-dependent moving forward.
Median expectations for Final Q1 GDP are +1.4%, although some trusted sources are predicting +2.0%. Initial forecasts for Q2 GDP are +1.3%.
This does indeed give the Fed room for at least one, and maybe two 25 bps hikes. If it’s two, that will take Fed funds to 5.5%-5.75%, the highest rate since January 2001.
On the other hand, global growth prospects have dimmed in recent weeks, largely due to concerns about China’s tepid recovery. While rising global growth risks do not bode well for the industrial metals, they may spark some haven interest in gold.
Additional safe haven interest is being supplied by political tensions in Russia. On June 23rd, the Russian paramilitary organization Wagner Group initiated what has been called a “rebellion” against the government and began advancing toward Moscow. A negotiated deal reportedly halted that march, but plenty of uncertainty remains.
Gold closed slightly higher on Monday, but scope remains for further tests of the downside. The next tier of support to watch is $1904.89/$1900.00.
A rebound above $1940.00 would ease short-term pressure on the downside and shift focus to more important resistance at $1983.51.
With the dollar still looking vulnerable, despite favorable interest rate differentials, I believe the underlying uptrend ultimately prevails and these setbacks are likely to be viewed as buying opportunities.
Silver
Silver has been hit harder by mounting global growth risks. The white metal dropped 7.3% last week. It was the second consecutive lower weekly close.
Investors have been slow to accept the realities of the supply/demand dynamics in the physical market. Demand reached a record 1.24 billion ounces in 2022, resulting in a massive 237.7 Moz supply shortfall.
This came on the heels of a 51.1 Moz deficit in 2021. The Silver Institute is predicting another deficit this year of approximately 142.1 Moz.
While the Silver Institute sees industrial demand growing by 4% this year, they predict overall demand to contract by 6% due to weaker expectations for the silverware, jewelry, and bullion sectors.
Growth risks will continue to periodically spook investors in the paper market resulting in price retreats. However, such setbacks are likely to be viewed as buying opportunities.
Many believe that the industrial sector is largely recession-proof at this point with sweeping electrification initiatives being supported by government subsidies. I’m inclined to concur and would therefore consider this year’s low just below $20 to be well protected.
PGMs
Platinum remains on the defensive, dropping nearly 7% last week. It was the second consecutive lower weekly close.
Substitution for palladium has been helping to underpin the platinum market as the auto sector recovers post-COVID. While that is still happening, accelerating the adoption of electric vehicles may be becoming the more dominant storyline.
EVs accounted for 14% of global new car sales in 2022. That figure is expected to rise to 18% in 2023. Some are projecting that EVs will make up 35% of new car sales by 2030.
That bodes well for silver and copper, but not so much for the PGMs. Platinum has probed back below the midpoint of the COVID-era range, leaving this year’s low at $902.16 vulnerable to a retest.
Palladium slid to a 4½-year low of $1262.22 last week, keeping focus squarely on the downside.
Palladium is facing the double-whammy of substitution for still significantly cheaper platinum and the rising market share of EVs.
The next support to watch is $1243.20 based on a Fibonacci objective.
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