Despite Middle East escalation, interest rates remain the key price driver for gold and silver – StoneX
Interest rates are still the key driver for precious metals prices even as the conflict between the United States and Iran escalates further, with gold and silver facing continued downside risk, according to Rhona O'Connell, Head of Market Analysis for EMEA & Asia at StoneX.
“After a period of uncertainty that has kept retail investors on the sidelines, there are signs of some buying in parts of the Far East – but this is being offset by continued sales elsewhere in the region, leading more or less to a zero-sum game,” O’Connell wrote in the firm’s weekly precious metals roundup on Monday. “Middle Eastern activity remains subdued with gold largely at a discount, although there is some interest developing in India in both metals (India is the world’s largest consumer of silver jewellery and silverware with 51% of the sector and 9% of total global offtake). This may well prove supportive but is not enough to boost prices. The professional market continues to fight shy of short-term activity apart from immediate reactions to rate moves, in turn propelled by geopolitics.”
“Narrow ranges remain the order of the day and we continue to believe that the downside is marginally more likely than sustained rallies,” she warned.
O’Connell also analyzed the CPI breakdown for June, noting the outsized impact that energy costs exerted on overall spending.
“Obviously, shifts in prices modify the different inflationary contributions from different sectors, but energy itself was ~8% of total in June (compared with the more normal historical 6-7%), but indirectly its contribution is higher due to energy’s influence on transport, manufacturing and logistics,” she noted. “The drop in inflation in the June reading, which we believe will be reversed in July, was almost entirely due to energy, which fell by almost 6% in the month and translates into almost all the 0.4% fall in headline CPI. On a broader scale, labour costs comprise roughly 60% of business costs, but that is not the same as 60% of inflation.”
O’Connell pointed out that even though WTI crude oil was down 26% from its high of $113 set on April 6, it remains 24% higher year-over-year. “Given the strains in the Middle East we should expect prices to persist in the new range,” she said. “If conditions settle, prices could well drift towards $70 over the next twelve months or so, as (if) the war premium unwinds. That does not take the heat out of inflationary forces, however, as supply chain disruption will take time to work off.”
O’Connell said all of this adds up to a very difficult and delicate challenge for the Federal Reserve as this month’s monetary policy decision approaches.
“The next meeting is next Tuesday / Wednesday 28/29 July and the Fed is now entering its blackout period,” she noted. “Most recent comments from FOMC members have been mixed; Chris Waller, who used to be a proponent of easier monetary policy, has changed course and last week told the New York Association for Business Economics that if upcoming inflation data remain strong the Fed may need to raise rates. He pointed to tariffs, high energy prices and AI-related investment. Overtightening is clearly a risk and he believes the Committee needs several months of steady/reducing inflation pressures in order to be convinced that inflation is coming under control. The Committee remains divided and appears to be broadly 50% in favour of further tightening if inflation persists, with the rest preferring to remain steady.”
“Meanwhile the 10-year yield is a visible and flexible parameter, and the rise from below 4% at end-February to 4.6% now tells its own story, and provides a clear headwind for gold and, with its industrial bias, for silver,” O’Connell cautioned.
Turning to precious metals futures, O’Connell noted that interest in gold has risen while silver positions declined further, and longs still remain well below historical averages.
“The latest CFTC gold figures show a mildly bullish tone in the week to 14th July, with a 1.5% (6.1t) gain in outright Managed Money longs and 18.3% (8.3t) of short covering,” she said. “The outright long stood at 436t, which is 23% below the 12-month moving average.”
“Silver was different, with a 9% (280t) drop in outright longs and a 1% (6.2t) rise in outright shorts,” she said. “The outright long, at 2,822t, is a hefty 41% below the 12-month average.”
And regarding Exchange Traded Funds (ETF), O’Connell cited the latest World Gold Council figures showing a year-to-date gain of just 15 tonnes for a total of 4,045 tonnes as of July 10. “Falls of 67t (3%) in North America, a gain of just 12t in Europe (1%) and of 68t (16%) in Asia,” she wrote. “The Bloomberg figures to last Friday, which are not as comprehensive as those from the World Gold Council, suggest a further drop of 20t, to 4,035t. While this implies a net five tonne drop over the year, it also represents a fall of 108t from the mid-April high of 4,143t.”
Meanwhile, silver funds have shed even more this year though some buyers returned late last week to take advantage of lower prices. “Silver ETFs are reported at 24,413t, a drop of 2,408t in the year to date, with bargain hunting appearing in the latter part of last week, picking up 128t,” O’Connell said.
