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Gold prices may need clear signal of Fed cuts to break $2000, industrial silver demand set to rise - Heraeus

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(Kitco News) - Gold prices are staying steady even as interest rates remain at 22-year highs, but they will probably need a clear dovish signal from the Fed to rally decisively above $2000 per ounce, according to the latest precious metals report from analysts at Heraeus.

“The gold price had a muted reaction to the FOMC meeting following the recent $200 rally which peaked above $2,000/oz, suggesting there is some fatigue in the gold market after being supported by safe-haven demand on the conflict in the Middle East,” the analysts wrote. “It is possible we will see some of this ‘war premium’ dissipate over the next few weeks, assuming there is no significant escalation in the conflict.”

They noted that this downside risk is being compounded by rising risk appetite. “The S&P 500 has fallen by 10% in the last three months, though it rallied by ~4% last week, coinciding with the stall in gold’s rally. If the zone of resistance formed around $1,980 holds, the gold price could bounce slightly higher,” they said. “To sustainably move above $2,000/oz, however, it may need a clearer signal from the Fed that cuts are coming, and the return of investors to ETFs which have seen outflows of >200 tonnes so far this year.”

The Heraeus analysts also pointed to elevated and sustained central bank purchases as another factor supporting gold prices. “Abnormally high levels of central bank buying may help to explain why the gold price is defying downward pressure from both US dollar strength and surging bond yields so far this year,” they wrote, noting that central banks have added 800 tonnes of gold to their reserves, which is 14% more than the 2022 level at this point of the year.

“Central banks were forecast to show a strong bias towards gold buying this year, though they were not expected to match last year’s record level,” they said. “However, if Q4 is as strong as the previous quarter, global net central bank purchases would exceed last year’s record of 1,082 tonnes.”

Turning to silver, the analysts said they expect industrial demand to get a boost from the production increases of ethylene oxide. “There have been a number of large-scale capacity additions for ethylene oxide (EO) production in the last 18 months, they said. “BASF recently commenced production at its expanded plant in Belgium, while SABIC and INEOS have both recently constructed or expanded their production plants, adding to new silver catalyst demand.”

They added that demand for EO is likely to be softer this year compared to 2022, “as requirements for the sterilisation of Covid-19 test kits are expected to fall,” but The Silver Institute’s ‘other industrial’ category, which includes EO demand, is still expected to grow by 7% this year to 144 moz.

The analysts also noted that the latest Commitments of Traders (COT) report “shows that non-commercial speculators added long positions for a third straight week while shorts continued to be covered.”

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.