On Monday, precious metal prices ticked upwards. Gold reached $4,362 an ounce, marking gains of approximately 3.4%. Silver’s price hit $71.2 an ounce, a rally of about 4.7%. We look at some of the key factors that are driving this rally in precious metal prices as this week progresses.
Crude oil prices dropped once a peace deal was signed between Iran and the United States. The signing of that truce caused West Texas Intermediate (WTI) crude to drop to $80 per barrel, which is the lowest price it has traded at in nearly three months. High oil prices stoked inflation, and with oil prices now coming down, the inflation headwind that was driving expectations of an interest rate hike has now reduced considerably.
With energy-driven inflation now coming down, precious metals have a breather and can rally based on other market drivers.
You may have noticed that silver’s rally outperformed that registered by gold on Monday in percentage terms. This wasn’t accidental. The silver market runs on two engines; its industrial demand, and its status as a precious metal. Just like gold, silver appreciates when inflation drivers slow down since higher interest rates put pressure on non-yielding precious metals.
The second engine, industrial demand for silver, also revved up at the same time as the easing of the inflation headwind. Industrial demand for silver had been suppressed due to the closure of the Strait of Hormuz. This shipping disruption adversely affected manufacturing activity, and now that a deal has been struck to reopen the strait, industrial demand is picking up from where it stopped. This explains why silver rallied more than gold.
Expectations of a Fed rate hike later this year have dimmed. Given that the high U.S. inflation data released for the month of May was driven by elevated energy prices, the signing of the peace deal to end the conflict in the Middle East has signaled a change in the direction of energy prices, as evidenced by the drop in WTI crude prices.
This means that inflation is unlikely to rise further, and analysts now say the Fed’s decision due tomorrow will most likely indicate keeping interest rates at their current level and some experts suggest that the monetary policy direction is likely to shift away from a possible hike later in the year to a possible cut. Precious metals are benefiting from this change in outlook.
Central banks have remained busy adding gold to their reserves. For 18 months in a row, including May, China has been adding gold to its reserves. The Polish, Czech and several other central banks have also added to their gold reserves, and there appears to be no sign of this trend losing steam.
Goldman Sachs has even made an upward revision of its forecast regarding the volume of central bank gold accumulation to at least 60 tons monthly for the rest of this year. Such demand can only mean that gold prices will keep going up since central banks aren’t the only demand drivers for the precious metal.
All in all, things are looking up for precious metals, and entities like New Pacific Metals Corp. (NYSE American: NEWP) (TSX: NUAG) could see increasing investor interest in their precious metal exploration operations.
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