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Gold and silver price analysis: How will the Fed rate and inflation outlook affect precious metals?

15:27, 2 August 2022

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In this article:
  • Silver
    Silver
    18.884 USD
    -0.745 -3.800%
  • Gold
    Gold
    1644.04 USD
    -26.06 -1.560%

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Close-up of a 20 dollar banknote note and gold bullions
Gold bullion and Federal Reserve issued paper currency (US dollar) – Photo: Shutterstock

Precious metals are experiencing a positive market momentum following the heavy declines of the past months, with gold and silver prices rebounding decisively from their year-to-date lows hit in July.

Silver experienced its best weekly performance in more than two years during the final week of July, while gold posted its second straight week of gains and broke above $1,770.

A confluence of factors, which will be explained in details below, has driven the sharp recovery in gold and silver prices recently, leading the market to bet on the possibility that the Federal Reserve would be forced to reverse its path of interest rate hikes in 2023.

Looking ahead, signals that the Federal Reserve is truly willing to let go of the brake pedal must emerge for this short-term rebound on silver and gold to translate into a major trend reversal.

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Gold and silver weekly price performance: rebound ongoing

a chart showing performance of gold and silverGold and silver weekly price performance as of August 2nd, 2022 – Photo: Capital.com, Source: Koyfin

Gold and silver fundamental analysis: Summer relief, autumn shock?

What are the major factors influencing gold and silver prices today, and what lies ahead?

Gold and silver prices are currently highly correlated with one another as they continue to be affected by the same macroeconomic factors, and specifically the outlook on US Federal Reserve policy, which is indicated by the changes in US real yields. 

The fact that the economy of the United States went into recession in the second quarter of this year served as a positive catalyst for the short-term trend of precious metals, which rose in value as a result of the reduced expectations regarding future interest rates.

The market thinks the recession will lead to a rapid drop in inflation, causing the Fed to take into account economic conditions in its future policy decisions.

There is an extremely tight correlation between gold and silver in 2022

a chart showing Gold, silver and US real yieldsGold, silver price and US real yields – Photo: Capital.com, Source: Tradingview

The market has already priced in a peak in US interest rates of approximately 3.4% in December 2022, followed by a cut in the first half of 2023.

Yields on 10-year Treasuries, a gauge of U.S. economic growth and Federal Reserve monetary policy, have fallen to levels not seen since early April. US real yields, a barometer of the Fed's monetary policy stance, have also fallen substantially

Silver

18.88 Price
-3.800% 1D Chg, %
Long position overnight fee -0.0107%
Short position overnight fee 0.0019%
Overnight fee time 21:00 (UTC)
Spread 0.032

Oil - Brent

85.68 Price
-4.260% 1D Chg, %
Long position overnight fee 0.0243%
Short position overnight fee -0.0444%
Overnight fee time 21:00 (UTC)
Spread 0.04

Gold

1,644.04 Price
-1.560% 1D Chg, %
Long position overnight fee -0.0157%
Short position overnight fee 0.0054%
Overnight fee time 21:00 (UTC)
Spread 0.60

Oil - Crude

79.16 Price
-4.970% 1D Chg, %
Long position overnight fee 0.0089%
Short position overnight fee -0.0251%
Overnight fee time 21:00 (UTC)
Spread 0.03

The strength of the US dollar (DXY) has been weakened by the worsening outlook on economic growth and lower interest rates, giving assets like gold and silver a huge amount of breathing room.

The market has priced in a Fed rate cut in 2023, which has weighed on US yields and the US dollar

fed rate, dollar and US 10-year real yields chartFed interest rate futures, US 10-year yields and US dollar index (DXY) – Photo: Capital.com, Source: Tradingview

Gold and silver analysis: three inflation scenarios and price implications

Is the market correctly pricing in a more dovish Fed as early as 2023, or has it made a miscalculation here?

The final answer will be determined by the trend of inflation in the coming months.

If inflation starts to fall at a steady rate and faster than expected, this will support the belief that a weakening economy could actually cause the Fed to change its plans and take a more dovish stance in 2023.

If inflation continues to be persistent at these levels or declines less than anticipated, but the economic picture continues to hold up well despite this, this may be the worst-case scenario for precious metals, as it implies that additional Fed rate hikes will be required to address inflationary pressures.

Finally, keep an eye out for a scenario that the market may not yet be correctly pricing, specifically inflation rising from here – let's say above a 10% threshold – despite an economic recession and higher interest rates.

In this case, inflation expectations could become unanchored among the population, bringing us back to the Great Inflation of the 1970s. In the short term, precious metals may experience significant volatility because the Fed will try to do whatever it takes to control inflation.

After the initial shock, however, people will gradually lose faith in the Fed's ability to control inflation through rate hikes, and investors will flock to traditional inflation-protective assets such as gold (see Gold and inflation: Why traders should prepare for Inflageddon?)

How could the inflation trend impact on gold and silver in the coming months?

Inflation trendFed's reactionMarket impacts on 
gold and silver
Falling faster than expectedDovish and will reinforce market pricing in Fed rate cuts in 2023Bullish
Sticky or falling but lower than expectedHawkish and the market could reprice Fed cut in 2023 if the economy stays strongBearish
Rising above 10%Hawkish but loss of faith in central banks could lead investors to seek inflation hedgesStrongly bullish

 

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