Both Gold and Silver have found themselves constrained by uncertainty throughout the quarter, however, some large moves were seen. Both precious metals found fresh six year lows during Q3 as the overarching bearish trend continued on speculation that an interest rate liftoff was on the cards. As we know, that hasn’t eventuated yet. Subsequently, both Gold and Silver found support to end the quarter not far off from where they started.
The Federal Reserve still remains a driving force, especially in the Gold market. The expectation of tighter monetary policy has been a prospect ever since the Fed announced it would taper QE. The bear trend in the Gold market has been a testament to that expectation, and this was the quarter that the market believed it would begin. Gold found support in the latter half of the quarter as the prospect of a rate rise at the September 17th meeting diminished. As it happened, rates remained on hold, however the looming prospect of a rate rise before the end of the year is keeping the metals from fully breaking out of the bearish trend.
The headache for the Federal Reserve is the persistently low inflation rate. Unemployment has pushed down to a six year low at 5.1%, which the Fed is pleased about, but still sees slack and room for improvement. The Fed is reluctant to raise rates on strong employment figures alone, and inflation is not playing ball. Consumer prices fell in August by -0.1% m/m and put the annual rate of CPI at just 0.2%, well shy of the Fed’s 2% target as commodity prices continue to remain depressed.
China has been a source of fear for the markets throughout the quarter with a debate going on about the depth of the current economic slowdown. The shock to global stock markets in August stemmed from a sharp selloff in Chinese equities as the industrial powerhouse begins to cool. Gold was in heavy demand thanks to the turmoil, however, Silver remained slightly more muted given it is used in industrial applications and consumer goods, not just as a store of wealth.
In the last report, we highlighted Greece as a major source of uncertainty and risk. That is no longer the case with disaster (i.e. a Greek Exit from the EU, or Grexit) being avoided seemingly after the bell had gone. Greece technically defaulted, but the government and its creditors worked feverishly to agree on a bailout programme. The deal saw Greece agree to even more strenuous austerity measures than had ever been presented, despite the Syriza party’s election promise to end austerity. They obviously saw the writing on the wall and realised it was better to remain within the EU. Things appear to be going smoothly for the embattled nation, but only time will tell if this is the last we hear of the saga.
The offshore headwinds, from the Fed’s point of view, are a cause for concern and are a possible reason for the delay in rate hikes. They may be waiting to see how much of an effect China’s slowdown will have on the US economy, before they pull the trigger.
Looking forward, Q4 2015 may prove to be a telling one for the precious metals markets. There is a very real risk for the Gold market that the Fed will push ahead with a rate rise regardless of the unsupportive data. We believe the Fed simply needs to raise interest rates (and probably should have done it some time ago), so that if the prospect of a recession looms, the Fed will have some wiggle room when it comes to interest rates. As it stands, rates cannot fall much further if trouble presents itself. That being said, if the Fed has not raised rates already, the likelihood of them raising based on the data is slim at best.
For precious metals, things could go either way. If the status quo remains, we will see them benefit further as rate rises are pushed back into 2016, which we see as the likely outcome. On the other hand, the Fed may see the need for breathing room and push ahead with their original plan of a 2015 rate liftoff, but the probably of this outcome is not great. Our bias is towards appreciation in the prices of both Gold and Silver in the coming months.