6/13/2024

'Higher for longer' signal from Fed weighs on precious metals

OUTSIDE MARKET DEVELOPMENTS: The precious metals are back on the defensive after the Fed signaled on Wednesday that rates would stay higher for longer. Changes to the dot plot for the appropriate target range for the Fed funds rate now indicate just one rate cut this year, down from a projection of three cuts in March.

Fed Chairman Powell acknowledged that there has indeed been significant progress toward lowering inflation to the 2% target, but that inflation remains too high. “We’ll need to see more good data to bolster our confidence that inflation is moving sustainably toward 2%,” said Powell.

Today's PPI print offers some additional evidence in that regard. PPI for May came in at -0.2%, below expectations of +0.1%, versus +0.5% in April. Annualized PPI edged down to 2.2% from a revised 2.3% in April. Core PPI was unchanged on expectations of +0.3%, versus +0.5% in April; 2.3% y/y.

Initial jobless claims rose 13k to a 10-month high of 242k in the week ended 08-Jun. Continuing claims jumped 30k to a 6-month high of 1,820k. While the labor market has remained largely resilient, as evidenced by last week's payrolls beat, we see some potential cracks forming.

Yields spiked overnight in Europe driving stocks lower as concerns about sticky core inflation alter expectations for further ECB rate cuts. The Fed's 'hawkish hold' is also seen as a limiting factor for the ECB.

The EU Commission announced tariffs on Chinese electric cars of up to 38%, following the lead of the U.S., based on what they perceive to be unfair subsidies from Beijing. A response from China seems likely, raising risks of a trade war.

GOLD

OVERNIGHT CHANGE THROUGH 6:00 AM CDT: -7.60 (-0.33%)
5-Day Change: -67.89 (-2.86%)
YTD Range: $1,986.16 - $2,449.34
52-Week Range: $1,812.39 - $2,449.34

Gold is holding above $2,300 but price action remains choppy, generally in the lower half of last Friday's large $99 range. The yellow metal caught a bid from the unexpected drop in May PPI and higher-than-expected initial jobless claims, as both can be viewed as evidence that a rate cut is warranted sooner rather than later.



However, the Fed provided a clear signal yesterday that they're thinking 'higher for longer' which would pose up to a medium-term headwind for gold. The Fed indicated that a single rate cut is now likely this year, down from a projection of three cuts at the time of the March FOMC meeting.

I suspect the hawkish Fed bias will keep at least short-term focus on the downside or at lease ongoing base-building. The breach of support marked by Wednesday's low at $2,311.36 leaves Tuesday's low at $2,298.90 vulnerable to a retest. Penetration of the latter would return focus to the $2,289.43/$2,287.64 lows.

Fresh cycle lows in silver today are seen as an additional weighing factor on gold.

Geopolitical and economic uncertainties will continue to provide longer-term underpinning for the gold market. As will central bank gold demand, even if the PBoC has paused its buying.

Minor intraday chart resistance is noted at $2,324.60. Yesterday's high at $2,339.48 is the more important level to watch on the upside.


SILVER

OVERNIGHT CHANGE THROUGH 6:00 AM CDT: -$0.463 (-1.56%)
5-Day Change: -2.197 (-7.02%)
YTD Range: $21.945 - $32.379
52-Week Range: $20.704 - $32.379

Silver fell to another new 4-week low of $28.963, weighed by EU tariffs on Chinese EVs and a surprise decline in Eurozone industrial production in April.



Electric vehicles are a major source of silver demand, using up to twice as much metal as internal combustion vehicles. Making Chinese EVs more expensive in Europe (and America) could reduce demand.

The contraction in EU industrial production accelerated to -3.0% y/y in April, versus a revised -1.2% in March.

While the white metal rebounded into the range intraday, the downside remains vulnerable with scope for a test of $28.467 (61.8% retracement of the leg-up from $26.049 to $32.379). Today's earlier low at $28.963 provides intervening support.

The halfway-back point of the decline off of Friday's high at $31.516 is recalculated as $30.190. This level is reinforced by Wednesday's high at $30.169.


Peter A. Grant
Vice President, Senior Metals Strategist
Zaner Metals LLC
Tornado Precious Metals Solutions by Zaner
312-549-9986 Direct/Text
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