SILENT SQUEEZE
After Jackson Hole, markets started to price in the possibility that the Fed may raise interest rates again. Kevin Warsh did not directly signal a rate hike. However, his comments that inflation is still high increased expectations for a possible rate hike in September. Still, this does not mean that a new and long rate-hiking cycle has started. This week, the main focus will be on inflation and employment data. Oil has moved back above $90 due to tensions between the US and Iran. Geopolitical risks support gold, but higher oil prices also increase inflation and interest rate expectations. This continues to put pressure on gold. Gold is trading around $4,442/oz.
Silver, once again, is moving in its own way. The price is around $67/oz and is up about 1% today. However, the sharp sell-off after Warsh’s comments once again showed why silver is more volatile than gold. Silver is both a monetary and an industrial metal. So, when the dollar and interest rates rise, silver comes under pressure like gold. At the same time, it also reacts to changes in the industrial cycle.
The platinum story looks more interesting to me. Platinum is trading around $1,807/oz today. Palladium is around $1,407/oz, and its outlook is still one of the most uncertain among the four metals. In the long term, electric vehicles may reduce demand. However, hybrid vehicles may stay on the roads for longer than expected, which could keep automotive demand stronger for longer. For this reason, the supply deficit story is much clearer for platinum than for palladium.
In short, we are starting the new week with two different forces. In the short term, we have a hawkish Fed and a strong dollar. In the medium term, physical precious metal markets are becoming tighter. Employment data will be the first test this week. A weaker labour market could quickly reduce expectations for a September rate hike and give precious metals some breathing room. Strong employment and persistent inflation, however, could turn Warsh’s comments into a real policy possibility.
So, the main question for precious metals is: How much longer can higher interest rates keep precious metals under pressure?