Near Term Challenges for Gold and Silver

Gold prices will continue to be held back by the Fed’s higher-for-longer policy stance, while silver supplies appear capable of meeting even upwardly revised solar demand, according to the latest precious metals report from Heraeus.

“The gold price requires a less hawkish Fed in order to rise,” the analysts wrote following last week’s pause by the FOMC, noting that the Federal Reserve’s updates to their two-year outlook were significant.

“The Fed members’ dot plot shows that most of them expect one final hike this year, with an upwardly revised expectation of where interest rates will remain over the next 24 months,” they said. “As always, it will be a case of watch what they do and not what they say, as the Fed’s interest rate forecasts are rarely accurate.”

Markets don’t see another hike in 2023

The CME FedWatch Tool currently shows a 74.4% chance of another hold in November, and a 59.4% chance of a hold at the final FOMC rate decision on December 13, meaning market participants aren’t buying another hike in 2023.

Source: Kitco

“This would likely be to gold’s advantage as it would have the effect of weakening the dollar, a positive driver for the gold price,” the analysts said. “On average, the gold price has been 6% higher one calendar year after the final interest rate hike of each hiking cycle since 1984, which, if rates are held at the next meeting, would have been in July.”

They warned, however, that barring “a deterioration in the health of the US economy” going into fall 2024, they think markets are unlikely to see a cut that soon. “It is more probable that interest rates will stay high until next year, meaning the gold price should remain under pressure,” they said.

Silver supply can meet burgeoning solar demand

Turning to silver, the Heraeus analysts noted that Chinese solar demand continues to be revised higher, which will absorb an ever-increasing percentage of silver supply.

“Chinese solar capacity reached half a terawatt in August following the addition of the equivalent of the entire US solar capacity so far this year (133 GW),” they wrote. “The production base in China is expanding rapidly, and growth is likely to be faster than thrifting of silver can be achieved to lower loadings, leading to a forecast increase in solar silver demand this year.”

They said that China is on track to exceed the previous estimates for both solar installations and solar cell/module production. “Consequently, record solar silver demand is predicted for this year, which may exceed 165 moz, or more than 14% of global silver demand and 25 moz higher than in 2022,” they wrote, citing the latest data from The Silver Institute.

They also noted the impact of product innovation in solar technology on silver demand. “Newer TOPCon-type cell capacity is increasing; on average, the cells have ~30% higher silver loadings than traditional PERC-style cells,” they wrote.

But despite these bullish indicators for the gray metal, they expect the total supply of silver to be able to meet demand, which will serve to cap price increases. “Despite a significant increase in demand, the silver price is not well correlated to industrial demand, and above-ground stocks of the metal will be able to satisfy greater demand if mined supply cannot,” they said.

Originally published by Ernest Hoffman at Kitco