July 8th, 2022

Gold and silver prices fell sharply starting on Friday 1 July and continuing over the course of the first week of July.

In reality, gold and silver began weakening in the middle of June, setting the stage for the sharper, more dramatic declines at the start of July.

Equally important is the fact that gold and silver did not fall in a vacuum. The prices of stocks, bonds, non-dollar currencies, petroleum, base metals, and a full range of other commodities all were falling sharply at the same time. Gold and silver were reacting to the same factors that were driving a full range of financial asset prices lower.

There are causes and there are occasions, the latter being the triggers for developments with different root causes.

The root causes of this broad sell off of financial assets has been a shift over the past three weeks in the market consensus view of the economic environment. The first half of this year was characterized by a market consensus first of higher than expected, worrisome inflation, which then led to concerns about higher than expected interest rate increases which led to concerns about recession.

Since the middle of June the narrative, the data, and the market consensus has shifted. Prices will stay high for a time, but inflation rates may continue to come down, as the core CPI index has over the course of April and May. (We will find out about June CPI on 13 July.) Based on that softening of inflation expectations the consensus now is that interest rates will rise, but not so high as to throw the U.S. into an economic recession. Real economic growth has slowed and will remain low, but a recession may be several quarters into the future.

This shift in market perceptions of current and prospective inflation, interest rate, and real economic trends has caused an even heightened sense of uncertainty among investors, and a rush to cash. The U.S. dollar has risen sharply as a result, while most other assets, including the super-charged U.S. housing market, have seen prices decline.

Those Other Factors

As mentioned at the start, the shift in market consensus has been the bigger cause for the sell off across financial assets classes, but a host of factors, some general and some specific to gold, silver, and other commodities have contributed to the sell off. The following is a partial list.

1. Financial markets reducing their inflation expectations.
2. Financial markets’ recession concerns receding.
3. A lower than expected PCE Price Index for June released 30 June at 6.3%, suggesting to financial markets that the FOMC may reduce the ramp up in any interest rate hikes at their future meetings. (26 – 27 July is the next FOMC meeting.)
4. Lower nominal interest rates, but higher real rates, with inflation expectations falling faster than nominal rates.
5. A stronger dollar.
6. A breakout in prices to the downside of a price range ($1,808 and $1,850) that has held since the middle of May.
7. The U.S. government gaining some power in international politics.
8. Financial markets realizing that a lot of the propaganda about a ‘non-western’ political and economic bloc is bluster.
9. Silver and gold investors hearing mea culpae from promoters who have been predicting that Comex would run out of silver, that silver prices would rise to $50, $100, $700… and other things.
10. The end of the roll in July Comex silver futures contracts.
11. The “4^thof July Effect:” Investors not wanting to be long gold in the face of all of the above on a three day weekend when US markets are closed on Monday while London is open.