Gold and silver look to FOMC for direction

The precious metals sector has spent most of January consolidating following strong gains during Q4 last year when gold rose 11.4% and silver 7.2% as the US rate focus finally turned away from more hikes to cuts. The small losses seen in both metals so far this month have mostly been driven by a stronger dollar, up around 2% against a broad basket of major currencies, and the market taking a raincheck on the timing, pace and depth of incoming rate cuts. Note, the market is currently pricing in a 50% chance of a rate cut at the March 20 meeting while expectations for the entire year have moderated from six to five 25 basis point rate cuts. 

While gold has been drifting lower only to bounce after finding strong support ahead of $2000, silver has - almost as per usual – experienced a roller-coaster-month, at one point slumping to a two-month low before recovering strongly, supported by a China stimulus-led rally in industrial metals. The result being a very volatile relationship between the two metals which at one point saw the gold-silver ratio surge to a September 2022 high above 92 ounces of silver to one ounce of gold, before dropping back to the current 88 ratio. 

The fact gold has ‘only’ lost around 1% despite the stronger dollar and a pickup in bond yields and reduced rate cut expectations is likely to have been driven by geopolitical concerns related to tensions in the Middle East, the worst since at least the 1970’s according to US Secretary of State Blinken, and not least continued strong demand for physical gold from central banks and China’s middle class attempting to preserve their dwindling fortunes caused by the property market crisis and one of the world’s worst performing stock markets as well as a weakening yuan.

According to data from China’s General Administration of Customs, imports of gold for non-monetary use rose to 1447 tons last year, breaking the previous record of 1427 tons in 2018. Most Chinese individuals are unable to buy US dollars or US dollar-denominated products to hedge against yuan depreciation, meaning buying gold as the most accessible means to safeguard the value of their assets, a demand which at some point last September saw spot gold prices on the Shanghai Gold Exchange trade around 120 dollars per ounce above the London spot price. In addition, the People’s Bank of China (PBOC) was a very active buyer last year, accounting for close to one-quarter of all central bank purchases, after lifting their reserves by 225 tons to 2235 tons by year end (Source: World Gold Council).