Gold and silver recover as oil and the US dollar ease
Gold and silver recovered on Friday after Thursday’s sharp inflation driven selloff, with precious metals finding support as crude oil prices pulled back and the US dollar weakened.
At the time of reporting, spot gold was trading around US$4,347 an ounce, up approximately 0.73%, while spot silver was around US$64.26 an ounce, gaining approximately 1.28% on the session.
The recovery came despite financial markets continuing to price in a significantly higher probability of a Federal Reserve rate hike at its September meeting.
For gold, the competing forces remain clear. Higher interest rates and Treasury yields can create short term pressure on assets such as gold, while geopolitical uncertainty, inflation, currency concerns and demand for physical assets can provide support.
US inflation keeps the Federal Reserve in focus
The latest US Consumer Price Index data was broadly in line with expectations at the headline level, although underlying inflation remained firm enough to influence expectations for Federal Reserve policy.
Financial markets are now pricing an approximately 85% to 90% probability of a 25 basis point rate increase at the next Federal Reserve meeting.
US Treasury yields initially moved sharply higher following the inflation data. The 10 year Treasury yield briefly approached 4.99%, while the 30 year yield moved above 5.42%, its highest level in almost two decades, before both eased later in the session.
For gold, higher bond yields can make interest bearing assets more attractive compared with an asset such as gold, which does not pay interest.
However, the precious metal market demonstrated that higher yields do not automatically result in sustained selling.
As oil prices and the US dollar eased, gold found buyers and recovered.
Gold finds support around US$4,300
Gold managed to stay above the US$4,300 area, an important level that traders are watching closely.
In simple terms, this means buyers stepped in as the price approached this area rather than allowing the selloff to continue unchecked.
If gold can continue rising and move convincingly above about US$4,400, it could signal that buyers are regaining control. The next areas traders will be watching are around US$4,490 and then US$4,540.
On the other hand, if gold falls below approximately US$4,320, the market could come under renewed selling pressure. A deeper decline could take the price towards US$4,270 and then approximately US$4,230.
These price levels should not be viewed as predictions. They are simply areas of the market where buyers and sellers have previously shown significant interest.
Silver attempts to recover from its sharp fall
Silver also found support after suffering a substantial decline of more than 5% during Thursday’s trading.
Spot silver managed to stay above approximately US$62 to US$62.50 and recovered towards US$64.26.
If silver can move back above US$65.60, traders are likely to watch the US$68 area next, followed by approximately US$72.
If the selling returns and silver falls below around US$62, further weakness could take the price towards US$60.
As with gold, these levels are areas being watched by market participants rather than guarantees of where prices will go.
Oil remains a major source of uncertainty
Energy markets remain an important part of the inflation story.
Crude oil prices retreated on Friday after reports that regional foreign ministers were attempting to establish a temporary shipping arrangement through the Strait of Hormuz.
Brent crude nevertheless remained on track for a substantial weekly gain, while geopolitical tensions involving the United States and Iran continued to threaten energy supplies.
The Strait of Hormuz is particularly important because disruption to shipping through the waterway can quickly influence global oil prices.
Higher oil prices can feed directly into inflation, potentially making the Federal Reserve more cautious about cutting interest rates.
This creates an unusual situation for gold.
A prolonged oil shock could increase inflation and interest rate expectations, which may initially put pressure on gold as bond yields rise. At the same time, geopolitical uncertainty and concerns about currencies, purchasing power and financial stability can increase demand for gold as a defensive asset.
Gold is being pulled in two directions
The current market demonstrates why gold prices cannot be explained by interest rates alone.
On one side, investors are dealing with:
Higher inflation
Higher Treasury yields
Potential US rate increases
A still uncertain interest rate outlook
These factors can create short term pressure on gold.
On the other side are:
Geopolitical tensions
Oil supply risks
Currency uncertainty
Government debt
Inflation concerns
Central bank gold demand
Demand for physical precious metals
These forces can support precious metals.
The result is a market capable of experiencing significant volatility while maintaining a much larger long term trend.
What does this mean for physical gold buyers?
For someone accumulating physical gold, a daily move of several percentage points can look significant.
However, physical gold buyers are generally dealing with a different objective from short term traders.
Rather than attempting to predict the next move in the gold price, cost averaging allows buyers to accumulate physical metal progressively over time.
When prices rise, the same dollar amount buys less gold.
When prices fall, the same dollar amount buys more gold.
This removes some of the pressure associated with trying to identify the perfect time to buy.
For Australians, the local gold price is also influenced by the Australian dollar exchange rate. This means that movements in the international US dollar gold price do not always translate directly into the same percentage movement in the Australian dollar gold price.
Physical gold is different from a paper price
The headline spot price represents the international reference price for gold. A physical bullion transaction also involves the costs associated with manufacturing, refining, transportation, insurance, storage and dealing.
For this reason, buyers of physical bullion should consider the actual price of the physical metal they are purchasing, rather than looking only at an international spot quotation.
At FirstGold, the focus is on physical precious metals rather than trading paper contracts or attempting to predict short term market movements.
Customers can accumulate allocated physical gold, silver and platinum, including through cost averaging.
The bigger picture
Friday’s recovery demonstrates the resilience of precious metals in a market dominated by competing economic and geopolitical forces.
Gold remains above the important US$4,300 area, while silver is attempting to rebuild after its sharp decline.
The immediate direction of the market will continue to be influenced by US inflation, Federal Reserve policy, Treasury yields, the US dollar and developments surrounding oil supplies.
But for long term physical precious metal holders, the bigger question may be less about where gold trades next week and more about what happens to purchasing power, government debt, currencies and monetary policy over the years ahead.
Gold has been used as money and a store of value for thousands of years.
Short term prices can change quickly. Physical ownership is a long term decision.
FirstGold
FirstGold provides Australians with access to physical allocated gold, silver and platinum, with options to accumulate metal through cost averaging.
Build wealth one gram at a time.
Disclaimer: This article is for general information only and is not financial advice. Precious metal prices can rise and fall, and past performance is not indicative of future results.
