Precious Metals Poised for Breakout

While gold and silver prices suffered setbacks this week, there are strong reasons to believe that both precious metals could find the wind at their backs during the coming week, with long-awaited rate cuts and the risk of a U.S. employment downturn on the docket.

But first, a look at the fundamental picture for precious metals. 

Maria Smirnova, Managing partner at Sprott and Chief Investment Officer at Sprott Asset Management, wrote in their recent silver report that she sees all the stars aligning for the gray metal.

“For the third year, silver demand significantly exceeded supply in 2023 as demand for industrial applications continued to increase,” Smirnova said. “Much of this growth has been driven by photovoltaics, and overall, industrial demand is forecast to rise by 9% this year to a new record high.”

Smirnova added that this dynamic will support silver miners even as it boosts the gray metal’s market price. She also pointed out a fundamental shift in demand for silver, which she believes will continue.

“Historically, half of the demand for silver has been industrial, and the remaining half has included investment and investment-like categories such as jewelry, silverware, and actual bar and coin investment,” she wrote. “In recent years, however, the balance has been shifting in favor of industrial demand, which now represents 55% of the total demand for silver,” which would represent “an 11% jump from 2022.”

Sprott sees three major areas for growth in industrial demand for silver in the coming years: The solar energy industry, the automotive sector, including electric vehicles (EV) and their associated infrastructure, and artificial intelligence (AI).

Silver’s supply/demand imbalance is also expected to worsen, with the supply deficit projected to rise by 17% in 2024, while industrial demand will increase by 9%. “We have already seen a decline of ~480 million ounces of silver held on the major exchanges since February 2021,” she pointed out.

“One can only postulate the amount of time it will take to deplete the remaining ounces, given the metal’s precarious supply/demand situation,” Smirnova concluded. “We believe the global energy transition will be highly positive for silver, leading to much higher prices for silver bullion and equities.”

And the winds may be shifting for gold as well, with signs that investors outside of China are finally warming to the yellow metal. 

According to Nitesh Shah, Head of Commodities and Macroeconomic Research at WisdomTree Europe, “Exchange-traded product (ETP) investors who had sat on the sidelines for some time are now starting to cheer the metal on in some corners of the world.”

He highlighted investment demand for physical gold in China as the primary source of strength for the precious metal over the past month. 

“Chinese gold ETPs have seen inflows five months in a row,” Shah noted. “April attracted RMB9bn (US$1.3bn), the strongest month on record, pushing the total assets under management (AUM) to another historical high of RMB46bn (US$6.4bn). Meanwhile, holdings also registered the largest ever monthly increase, rising 17t to 84t.”

But Shah said North America may be joining the party as well. “In recent weeks, we have witnessed some strong flows into US-domiciled ETPs as well, possibly pointing to outflows reaching a base.”

Next week promises a return to a more normal rhythm of economic news releases, with several major highlights that have the potential to propel metals prices higher.

On Monday, markets will receive the S&P global manufacturing PMI and the ISM manufacturing PMI for May. 

Then on Wednesday, the Bank of Canada will announce its interest rate decision, with economists predicting a quarter-point cut, and shortly afterward, markets will receive the ISM services PMI for May.

Thursday morning brings the ECB interest rate decision, with markets priced in for a 25 basis point cut to the benchmark interest rate, along with weekly jobless claims. 

And finally, Friday morning brings the release of May's nonfarm payrolls report.

Should both central banks deliver the expected rate cuts, and should the May employment report disappoint to the downside, markets may quickly recalculate the timing and the scale of the Federal Reserve’s easing rate path. Stay tuned.

This article originally appeared on Kitco News