Gold and Silver Stay Under Pressure Until the Federal Reserve Blinks

Gold has fallen around 3% and silver around 4.7% to seven-week lows, as oil prices climbed just under 3% on fading hopes of a Middle East ceasefire. The path to a gold and silver recovery runs through the Federal Reserve, which would need to close the door on further rate hikes for U.S. Treasury yields and the U.S. dollar to ease. The 10-year U.S. Treasury yield has climbed to a fresh 19-year high, and the U.S. dollar is hovering near a two-month high. Until those pressures reverse, gold and silver remain exposed to the rising cost of holding assets that pay no yield.

Fiona Cincotta, StoneX Senior Market Analyst, has more than 15 years of experience trading and analyzing U.K., European and U.S. markets, combining fundamental and technical analysis. She covers forex, equities, commodities and crypto assets from a macroeconomic perspective, following the central bank policy, bond yield and currency moves that drive gold and silver prices.

Key Themes

• Markets price roughly a 70% chance of another Federal Reserve rate hike in October.
• Rising U.S. Treasury yields and a firmer U.S. dollar raise the cost of holding non-yielding gold.
• Gold and silver both trade below their 50 and 200 exponential moving averages.

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Federal Reserve Hawkishness Keeps Gold and Silver Under Pressure

The Federal Reserve's tightening bias is the main obstacle to a gold and silver recovery, following a 25-basis point rate hike in September and with markets pricing roughly a 70% chance of another in October. Recent commentary has leaned firmly in one direction, with "Fed speakers really lean hawkish, warning about persistently high inflation and the need to tighten policy in order to bring inflation back to the 2% target," according to Cincotta. Higher rate expectations lift U.S. Treasury yields and the U.S. dollar, raising the opportunity cost of holding gold, which pays no yield. A stronger dollar also makes "the U.S. dollar denominated precious metal more expensive for holders of other currencies", adding a second drag on gold demand. As a result, gold and silver prices stay linked to each shift in Federal Reserve rate expectations.

Core PCE and Payrolls Data Test the Gold and Silver Recovery

"If we see signs of sticky inflation combined with a strong jobs market, that could really cement expectations for a Fed rate hike in October," Cincotta says, pointing to two U.S. data releases that shape the backdrop for gold and silver. The core personal consumption expenditures (PCE) price index, the Federal Reserve's preferred inflation gauge, is expected to come in a little hotter than previously. The U.S. nonfarm payrolls report follows a very strong prior reading, with expectations for another strong number. Hot readings on both would support U.S. Treasury yields and the U.S. dollar, extending the pressure on gold and silver prices. For self-directed traders, these two releases are the clearest signal of whether the Federal Reserve holds its hawkish stance.

 

--- Written by Frédéric Guétin, StoneX Media Producer

--- Expert: Fiona Cincotta, StoneX Senior Market Analyst