Gold steady, silver strong as rates keep rising!

Jul 13, 2023

Gold prices eased marginally over the last week-during 3 to 8 July, in USD terms, with the precious metal last trading at USD $1964 per troy ounce (oz), with a rally in the last 24 hours undoing price weakness seen earlier in the week. Silver has fared better over the past five trading days, up 3% to USD $24.20oz, with the gold to silver ratio (GSR) declining to 81.

Equity markets in the US continue to show upward momentum, with the S&P 500 +2%, with technology stocks continuing to drive the market higher. Commodity markets were well bid across the week, up 3% across the board, with oil holding above USD $70 per barrel.

Bond markets continue to sell off, with 10-year bond yields in Australia heading back toward 4%, with the Reserve Bank of Australia (RBA) and other central banks hiking rates again this week to quell persistently high inflation rates- analysed ABC Bullion, Australia.

Gold prices rallied sharply overnight, with poor jobs data from the United States reinforcing market expectations of a continued slowdown and potential recession in the world’s largest economy. The precious metal surged by more than USD $20 per troy ounce (oz) at one stage, with this move enough to offset price weakness seen earlier in the week, with gold essentially unchanged over the past five trading days.

Silver has been on even stronger footing, up a further 3% for the week and again trading above USD $24oz, with the gold to silver ratio (GSR) now sitting at 81, with a potential move below 80 likely to encourage precious metal bulls.

The moves in precious metals and in other markets are occurring against a backdrop of a continued tightening of monetary policy conditions. This includes Canada, which saw another rate hike this week, and Australia, with the Reserve Bank of Australia (RBA) increasing interest rates by another 0.25% earlier this week.

This brings the local cash to 4.10%, with this week’s move representing the 12th increase in just 13 months. In total interest rates are now 4% higher than they were barely a year ago. There is potentially more to come, with inflation data suggesting prices are still rising at close to 7% per annum, with markets now expecting the cash rate to peak at close to 4.50% by late 2023.

While there is no doubt an eventual pivot will come on the monetary policy front, it has clearly been pushed back, with central banks so far displaying a commitment to getting inflation under control (at least in terms of what they are doing with cash rates), despite the obvious slowdown in the economy higher rates are causing, and the political flak they are taking.

Given these dynamics, it may well not be until much later this year that we see central banks hit pause on rate hikes, and not until 2024 that we see rates start to ease. Markets will no doubt get ahead of these moves, with an easing cycle likely to put downward pressure on the US dollar, which typically provides support to bullion, with analysts at Citi seeing gold head toward USD $2,200oz.

Monetary policy pivots aside, one of the other key discussion points for market commenters in recent times has been the debate surrounding the US debt ceiling, and whether or not powerbrokers in Congress and the White House would be able to reach agreement on increasing the amount of money the United States Federal Government is allowed to borrow.

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