Much has been said about the bull market in precious metals as gold rose 40% from March lows to August highs, while silver notably outperformed that and posted a 150% increase in the same time-frame. All this happening within 6 months is very impressive.
However, since August highs, both metals are plunging – gold is lower by 10%, and silver by 25%. That’s understandable, considering the steep rally in metals over the previous months.
The million-dollar question is; what happens next?
The big drop in gold and silver has primarily been driven by dollar strength. The dollar index hit a two-month high on Wednesday. Investors have moved to the USD due to concerns about a resurgence in coronavirus in Europe and the possibility of further economic lockdowns.
Nevertheless, the main driver of both the USD and metals is still the Federal Reserve (Fed). As the central banks started printing out trillions of dollars in March, the easing pace has slowed, and the Fed did not promise fresh stimulus at its September meeting, which led to a huge disappointment. Since then, the USD is heading up, while stocks and metals are heading down.
Additionally, the Chicago Federal Reserve President Charles Evans recently said that the central bank could raise rates before inflation averages 2% for a period of time. “We’ve sort of said we’re looking to get inflation up to 2%, and then after that, we could be raising rates and still have an accommodative setting of monetary policy,” Evans said on Tuesday.
Raising rates in this environment seems really unlikely, especially when the global economy is starting to slow again, and we are approaching the winter months which could mean more lockdowns and less economic growth.
Jay Powell confirmed that rates would stay at current zero levels, at least till 2023, and many economists fear the Fed will never raise rates again. That is the perfect environment for gold, especially when combined with massive money printing and uncertainty regarding the virus.
To conclude, we think that precious metals could shine again, and the latest decline is possibly no more than a correction in the long-term bull market. Fundamentals are still bullish, but gold and silver needed a correction.
Provided by Axiory