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Precious metals forecast: Interest rate hikes and the market

By  Yoke Wong

Edited by Valerie Medleva

11:41, 2 November 2021

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In this article:
Gold
Gold
1771.92 USD
1.33 +0.080%
Palladium
Palladium
1863.08 USD
12.49 +0.680%
Platinum
Platinum
986.95 USD
-2.89 -0.290%
Silver
Silver
22.297 USD
0.113 +0.510%
DXY
US Dollar Index
105.3501 USD
0.021 +0.020%

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Precious metals forecast

Precious metals investors are watching the market closely ahead of the Federal Reserve’s (Fed) meeting on 2-3 November, when the US central bank is widely expected to announce a tapering plan.

The Fed could start to unwind its monthly bond purchases and end the $120bn program entirely by mid-2022, which may lead to higher interest rates. The Fed rolled out quantitative easing (QE) policies to stimulate the Covid-hit US economy, but this monetary stimulus is set to end as the country’s economy stabilises. 

Metals such as gold and silver are considered safe-haven assets, which tend to fall in value when interest rates are higher, as funds flow towards more riskier investments with higher returns. 

Will this macroeconomic change alter the precious metals outlook in the short-term? 

Read this precious metals analysis to find out more.  

Short intro to the market

Besides gold and silver, other metals have investment value based on industrial demand for them. This precious metals list is known as ‘platinum group metals’ (PGMs), and includes platinum, palladium, ruthenium, rhodium, osmium and iridium.

Precious metal price predictions for safe-haven assets such as gold and silver often largely depend on macroeconomic factors such as interest rates and US dollar strength, while PGMs’ value is mainly driven by their demand from industry.  

Which are the top four precious metals to watch in 2021? According to InvestingNews.com, “[gold, silver, platinum and palladium] are the most popular of the precious metals, and all can be good investment choices.” 

In this article, we look at the latest precious metals market news affecting prices and investor sentiment for gold, silver and platinum. 

Latest news on precious metals and market overview 

  • Gold

Precious metals forecast

Gold spot prices fell ahead of the Fed’s meeting on 2-3 November. On 1 November, the metal traded at 1,786 an ounce, down 0.7% from a week ago. Although prices have recovered from the lows of $1,730 on 30 September, they remained under pressure from the stronger US dollar and higher bond yields. 

Daniel Hynes, senior commodity strategist at ANZ Commodities, wrote: 

“Gold prices fell the most in two weeks as a stronger US dollar and higher short-term yields on bonds weakened investor appetite for the safe haven metal. This comes ahead of the FOMC meeting, where the central bank is expected to outline its tapering of asset purchases.”

A stronger US dollar further pressured gold prices. The US Dollar Index (DXY) rose to 94.31 on 1 November, up 0.5% from 93.81 a week ago.

Central banks of Norway, New Zealand, Brazil and South Korea have already started tightening monetary policy. The trend of interest rate hikes is expected to continue into next year, said Georgette Boele, senior FX and precious metals strategist at ABN Amro

As more central banks tightened their monetary policies, more investments were withdrawn from gold. According to the World Gold Council (WGC)’s data published on 28 October, demand for gold fell 7% year-on-year in the third quarter of 2021, primarily due to outflows from gold-backed exchange-traded funds (ETFs). 

Global gold ETFs recorded 27 tonnes of outflow in Q3, compared with 274 tonnes of inflow at the same period in 2020. The surge of investment into gold ETFs last year was driven by economic uncertainty caused by the Covid-19 pandemic. The overall gold ETFs holding remained high at 3,592 tonnes in the first nine months of this year, WGC data showed.

  • Silver

Precious metals forecast

Silver prices also weakened over the past week to $23.87 an ounce on 1 November, down 2% from $24.38 on 25 October, according to LBMA data. 

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Spread 0.00323

Although prices fell last week, they remained 11.5% higher than the 15-month low of $21.53 seen on 30 September. 

Rising industrial metal prices, inflation and a softer US dollar supported silver prices in October, according to Saxo Markets

Silver is both an industrial metal and a safe-haven asset. Prices can be driven by base metal market movements and macroeconomic factors such as inflation and interest rates. 

  • Platinum

Precious metals forecast

Platinum prices fell over the past week as negative market sentiment led to some sell-off. On 29 October, the metal hit a low of $1,009, down 5% from a week before. Despite the dip last week, prices still remained 9% higher than the one-year low of $925 on 21 September. Platinum rebounded for most of October after the sharp decline in September as stricter emission standards for vehicles supported demand for the precious metal. 

On 1 November, prices recovered their losses to trade at $1,061.

Platinum is a key metal in catalytic converters used in vehicles running on diesel to convert toxic exhaust fumes into less-toxic gases. The rollout of stricter emission standards across the world has supported demand for the precious metal. Platinum prices were also pressured by reduced automotive production this year as a result of the global semiconductor shortages

In its third quarter report published on 28 October, South African PGM producer Sibanye-Stillwater wrote: 

“PGM prices continued to decrease during Q3 2021 as a result of the ongoing global chip shortage that continues to negatively impact PGM demand in the automobile industry. Prices have since stabilised and we remain confident that the automobile supply chain constraints should start easing during the course of 2022.”

Johnson Matthey, a major manufacturer of products containing PGMs, said that demand is likely to rise with the world’s net zero emission target.

Margery Ryan, principal analyst at Johnson Matthey, wrote: 

“Net-zero commitments made by the UK, the European Union, China and most recently the Biden administration in the USA, will require much greater use of hydrogen as an alternative to fossil fuels, and pgm will play an important role in the hydrogen economy.” 

The development of hydrogen fuel cell technology, which uses platinum as a catalyst, could increase the precious metal’s demand in the long-term. Hydrogen fuel cells produce emission-free electricity by combining hydrogen (fuel) and oxygen (from air) over a catalyst such as platinum. 

The reduced platinum consumption due to rising battery electric vehicles sales could be compensated by the new demand created by hydrogen fuel cell technology. 

Precious metals trader Heraeus wrote in its October report:

“The loss of platinum demand for vehicle catalysts could be exceeded by additional demand from electrolysers… Platinum used in electrolysers is only a few thousand ounces at present, but it is expected to grow rapidly as the hydrogen economy expands.”

Note that this article does not constitute financial or investment advice. Before  investing in precious metals, always do your own research and remember that your decision should be based on your attitude to risk, your expertise in this market, the spread of your portfolio and how comfortable you feel about losing money. Keep in mind that past performance is no guarantee of future returns. And never invest money that you cannot afford to lose.

FAQs

Are precious metals a good investment?

Precious metals prices have been volatile over the past year. While many rose at the beginning of 2021, they have dropped sharply in the second half of the year. Whether precious metals are a suitable investment for your portfolio depends on your investing goals and risk profile. You should always do your own research and never invest what you cannot afford to lose.

What are the main risks of investing in precious metals?

Price volatility is one of the main risks of investing in precious metals. Other factors to consider include changes in macroeconomic policies, the US dollar and the unpredictability of global events such as the Covid-19 pandemic. Safe-haven assets, like gold and silver, are also driven by changes in monetary policies, while PGMs are influenced by supply and demand.

What precious metal is the most valuable/expensive?

As of the time of writing (2 November), rhodium is the most expensive precious metal based. According to data from Johnson Matthey, a major manufacturer of products containing the platinum group metals (PGMs), rhodium last traded at $14,100 an ounce on 1 November.  

The difference between trading assets and contracts for difference (CFDs)

The main difference between CFD trading and trading assets, such as commodities, stocks and indices is that you don’t own the underlying asset when you trade using a CFD.

You can still benefit if the market moves in your favour or make a loss if it moves against you. However, with traditional trading you enter a contract to exchange the legal ownership of the individual shares or the commodities for money, and you own this until you sell it again.

CFDs are leveraged products, which means that you will only need to deposit a percentage of the full value of the CFD trade in order to open a position. But with traditional trading, you buy the assets for the full amount. In the UK, there is no stamp duty on CFD trading, but there is when you buy stocks, for example.

CFDs attract overnight costs to hold the trades (unless you use 1:1 leverage), which makes them more suited to short-term trading opportunities. Stocks and commodities are more normally bought and held for longer. You might also need to pay a broker’s commission or fees when buying and selling assets directly, and you’d need somewhere to store them safely.

Read more: Rhodium price forecast: Will deficit lift the market again?

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