Gold and silver have resumed their upward momentum, with both precious metals recording significant gains this week as a weaker US dollar and changes in US Treasury policy provide fresh support for the market.
Gold futures climbed around 2% on Friday to reach US$4,661.70 an ounce, its highest level since mid-May. Silver also advanced approximately 2%, breaking above US$70 an ounce for the first time since June.
Both metals are now approximately 5% higher for the week, marking a sharp turnaround after a relatively subdued summer period.
A Weaker Dollar Supports Gold
One of the key factors behind the latest move higher has been weakness in the US dollar.
The US Dollar Index is trading close to a three-month low, making dollar-denominated commodities such as gold and silver more attractive to international investors.
Ole S. Hansen of Saxo Bank highlighted the weaker dollar as an important driver behind the recent strength across commodity markets.
For gold investors, movements in the US dollar remain particularly important. When the dollar weakens, gold can become more attractive as a store of value and alternative monetary asset.
US Treasury Buybacks Add Another Catalyst
Another factor attracting attention is the US Treasury Department’s decision to increase its buybacks of longer-dated government debt.
The Treasury plans to double its buybacks of securities with maturities between 10 and 30 years.
According to UBS Group chief strategist Bhanu Baweja, the move represents an important signal for gold, particularly because of its implications for longer-term US government debt and bond-market liquidity.
Falling or changing Treasury yields can influence investor demand for gold because the precious metal does not pay interest. When the opportunity cost of holding gold changes, investment flows can quickly shift.
Gold and Silver Recover After a Difficult Summer
The latest rally comes after several months in which precious metals traded within relatively narrow ranges.
Gold spent much of the summer around the US$4,000–US$4,200 area, while silver generally traded between approximately US$50 and US$60.
The weakness followed an extraordinary period for precious metals earlier in the year.
Gold’s quarterly performance for the period ending June 30 was particularly difficult, with the metal recording a decline of around 16% — its weakest quarterly performance in more than a decade.
A stronger US dollar and changing expectations surrounding Federal Reserve interest-rate policy were among the factors weighing on precious metals.
But August has brought a significant change in momentum.
Gold has now recorded several strong moves higher, while silver has also pushed decisively through the US$70 level.
Could Interest Rates Change the Outlook?
The Federal Reserve remains one of the biggest variables for precious metals investors.
Higher interest rates can traditionally create pressure on gold and silver because investors can obtain higher returns from interest-bearing assets. However, the relationship is not always straightforward.
Markets are currently pricing in a significant possibility of a Federal Reserve rate increase later this year. According to the CME FedWatch tool, the probability of a December rate hike is around 70.9%, considerably higher than expectations for September or October.
This creates an interesting environment for gold.
On one hand, higher rates can provide headwinds for precious metals. On the other, concerns surrounding government debt, inflation, currency purchasing power and financial-market stability can continue to support demand for physical gold.
What Does This Mean for Gold Investors?
The latest rally is a reminder that gold markets can change direction quickly.
After spending much of the summer moving sideways, gold has once again pushed towards record territory, while silver has broken above a significant psychological level.
For long-term investors, short-term price movements are only one part of the picture.
Gold continues to be viewed by many investors as a way of diversifying a portfolio and holding an asset outside the traditional financial system. For those looking to build a physical bullion holding, periods of volatility can also provide opportunities to review an accumulation strategy rather than attempting to predict the exact market top or bottom.
At FirstGold, our focus is on helping Australians build physical precious-metal holdings through a disciplined accumulation approach.
Whether markets are rising, falling or moving sideways, having a strategy can be more important than trying to time every market move.
FirstGold is Your Physical Bullion Partner
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Disclaimer: Market prices can move rapidly and past performance is not indicative of future results. Precious metals can rise or fall in value, and investors should consider their individual circumstances and seek appropriate professional advice where required.
