(Kitco News) – Gold’s price trajectory remains dependent on a resolution of the Iran conflict, with the yellow metal likely to finish the year close to the current $4,000 level, while silver will continue to take its cues from the gold price as it trades between $55 and $60 per ounce, according to the new StoneX Quarterly Commodities Outlook.
“We concluded our previous outlook saying that we expected gold to be below USD 4,000 by year-end,” wrote Rhona O'Connell, Head of Market Analysis for EMEA & Asia at StoneX in the firm’s Q3 Outlook. “Well, that came more quickly than we were expecting and we dipped below USD 4,000 in late June, as the market has largely stood back from any fresh investment.”
O'Connell said much of gold’s recent price weakness is due to continued uncertainty over the outlook surrounding the war with Iran. “This has combined latterly with declining equities with the S&P falling almost 5% in one week in early June (gold is a key mitigator of risk and when there is marked weakness in the equities, gold is frequently sold in order to raise cash against potential margin calls),” she noted. “It has thus been arguable that gold's historic inflation hedging role has taken a back seat to risk mitigation.”
Addressing the recent ascension of Kevin Warsh to the chairmanship of the Federal Reserve, O'Connell said that despite Trump’s clear preference for lower rates, the new-look Fed appears ready to hold the line on inflation. “For now it certainly looks as if Warsh will continue to be his own man (but do bear in mind also that there is a committee of 12 here; this is not a kingdom),” she wrote. “Mr. Warsh has taken over with a resilient United States economy and a comparatively stable labour force, and although he has not laid out any specific target, part of his philosophy is to reduce Fed statements and he certainly doesn't like the dot plot very much so that may well bite the dust soon.”
StoneX believes gold is very much looking at the markets through the lens of the interest rate outlook. “The swaps markets are pricing in a 30% chance of a 25-point hike in Q4 and with the latest core PCE numbers coming in at 3.5% it is arguable that the 2% target may yet become a thing of the past,” she said. “For now, gold is fighting shy of rising rates.”
Turning to the outlook for gold, O'Connell said much of it hinges on the prospects for a long-term resolution of the Strait of Hormuz crisis, but she noted that the conflict has served to shake out the speculative bid from the bullion market.
“Most of the weak handed and or speculative holders have almost certainly been washed out over the past six months and this gives gold some upside headroom,” she said. “For now it is a question of wait and see.”
“We are not expecting any violent moves in either direction although the technical construction is pointing to a near-term drop,” she added. “If it holds around USD 4,000 over the next few weeks then this may well entice physical buyers back, while the official sector remains tuned in to the benefits of gold as a hedge in general but also against the debasement trade.”
O'Connell cited the recent World Gold Council central bank survey, which returned a record 76 responses. “Some 89% expect global central bank gold reserves to increase over the next 12 months with 45% expecting their own reserves to rise and only 1% expecting a decrease in their own holdings,” she noted. “Looking further out 78% expected gold to comprise a higher percentage of total reserves in five years' time, with 5% expecting significantly higher.”
“While the official sector cumulative purchases of almost 4,000t in the past four years are a key element of physical demand in the market, we believe what is more significant is knowing what drives those intentions,” she added. “If almost the whole official sector is looking at interest rate levels now, with geopolitics and inflation not far behind, then that ties in perfectly with what we also believe to be the key drivers. So with the Fed unlikely to move until Q4, if then, and the ECB potentially not hiking any further we have an interesting backdrop for the trajectory of the gold price.”
“We think that the year will end at roughly the levels prevailing now, but in the interim we expect some volatility around USD 4,000.”
O'Connell also referred to StoneX’s own recent research on China’s gold market, including the last 11 years of mine production, recycling, gold consumption, official PBoC gold purchases, and net imports.
“It is a matter of public record that the PBoC has not necessarily always declared its changes in gold holdings at the time that they happen,” she noted. “When we take the cumulative totals of those different components of China's local supply demand balance there appears to be a shortfall of something like 4,000t which could suggest that the Government may have been taking metal in but not necessarily directly into the PBOC's coffers.”
O'Connell then turned to the outlook for silver, noting that the yellow and gray metals have moved in virtual lockstep of late.
“Only 28% of silver mine supply is price elastic with the rest of the material mined as a function of the business models for copper, lead, zinc and gold,” she said. “We expect silver to continue to take its short-term guidance from gold, which means oscillation around the USD 55-60 mark for the foreseeable future but. as usual, likely higher volatility than that displayed by the gold price.”
O'Connell pointed to developments which StoneX believes will be the keys to silver demand going forward: “the advent of Al which requires much higher precious metals loadings in its chips than domestic electronics; the electrification of the vehicle fleet, although there is increasing flex in terms of deadlines and some companies have been shelving EV programmes and taking financial hits accordingly […]; the outlook for the Solar Cell Industry which is currently oversupplied but this will work its way through.”
“These elements mean that in the longer-term silver industrial demand will strengthen while there is not much upside in mine supply,” she wrote. “Where we may see some alleviation of tension is in increased scrap supplies. There may well come a time in the next two to three years when the gold silver ratio is seen to be less important to silver's price action than the underlying industrial usage as deficits increase so price discovery will be important in redressing any market imbalances.”
Among the potential bullish factors StoneX sees for gold and silver are “Possible reignition of tensions in/about the Middle East; Ukraine tensions also still in play; Supreme Court finds in President's favour in Cook case; Sustained official sector interest.”
The possible bearish catalysts for the precious metals include “Ceasefire takes on some permanencе; Risk of further equity weakness; Central Bank tightening; hawkish Fed after the change of Chair.”
