(Kitco News) – Gold prices face near-term headwinds from a hawkish Federal Reserve rate policy, while silver is entering dangerous reversal territory with longs hitting a multi-year high, according to precious metals strategists at Heraeus.
In their latest precious metals report, the analysts noted that gold prices got a boost following two G7 rate cuts last week, but the move was short-lived.
“On 6 June, the European Central Bank (ECB) implemented its first rate cut in five years, reducing the interest rate by 25 basis points to 3.75%, despite higher-than-expected inflation figures from May,” they wrote. “This move followed a similar rate cut by the Bank of Canada which reduced its interest rate by 25 basis points just a day earlier. These cuts reflect Western central banks’ shifting priorities to supporting economic growth rather than cracking down on inflation.”
The analysts pointed out that the euro:dollar exchange rate held up well in the wake of the ECB’s rate cut, but the greenback strengthened considerably on Friday, which exacerbated the yellow metal’s price weakness.
“The expectation is that the dollar would weaken when the Fed finally starts to cut rates too,” they said. “Historically, dollar weakness has been positive for the gold price. However, no change to US monetary policy is expected at the Fed’s meeting this week. While the timing of the first interest cut from the Fed is not set, the markets currently project a high chance of a cut in September.”
Of course, the big news in gold markets on Friday was China’s announcement that their central bank paused its gold purchases in May after 18 straight months of net purchases.
“This news may have hit sentiment towards gold, but precious metals seem to have been part of a broader sell off that impacted base metals which were also sold off steadily throughout the day on Friday,” Heraeus noted. “The longer-term trend for gold appears to be higher, but the price is still correcting its recent sharp rally. For now, the price is holding above previous support from $2,280/oz to $2,300/oz. Below that level the next price support could be around $2,200/oz.”
Gold is seeing a positive start to the week, with spot gold last trading at $2,303.75 per ounce, up 0.42% on the session at the time of writing.
Turning to silver, the analysts said that silver’s sharp slide on Friday erased its gains from earlier in the week.
“The price had closed above $31/oz on Thursday but ended the week below $30/oz,” they noted. “Despite net ETF outflows in recent months, non-commercial positions on silver futures keep building up, an indication that hedge funds and other leveraged speculators have supported silver’s rally.”
“Speculative long positions have rebounded to a four-year high over the last two months, suggesting that funds and other speculators are joining the rally rather than taking profits for now,” they said. “However, as the net speculative position reaches extremes, the risk of a price reversal in the short term also rises, since this often coincides with peaks in the price.”
Silver prices are also seeing a strong rebound to start to the week, with spot silver last trading at $29.426 at the time of writing for a gain of 0.85% on the daily chart.
