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The Second Half

Markets are expected to enter the second half of 2023 just as unclear about monetary policy, inflation, and a recession as they have been over the past year. Market sentiment regarding all of these macroeconomic factors have vacillated widely over the past 12 months. This confusion is expected to persist over the remainder of this year.

Inflation is at the center of this chaos. Headline inflation, which includes volatile food and energy prices, has been declining steadily. Core inflation, which excludes these two items, meanwhile, has been fairly resilient.

Commodity prices have softened over the course of the year, especially for energy, metals, and some food products. Some food commodities like sugar and coffee have been strengthening due to weather related issues. While most commodity prices have softened over the past several months, they are still high by historic standards. Further declines are possible, but they should not be expected to be sharp.

Core inflation has been sticky. Strength in the labor markets and in housing prices has been supporting this inflation. This resilience in core inflation has been concerning monetary authorities around the world.

Markets are not the only ones that are confused and unsure about various future macroeconomic outcomes, monetary authorities are too. On the one hand, monetary authorities remain concerned if they have done too little to curb inflation, on the other they still need to see the full impact of all the tightening they have already done to slow inflation. The fear is that excessive tightening could precipitate a recession. While central banks do not want to cause a recession, at this time their focus is more on controlling inflation and less on the unintended consequence of creating a recession.

If a recession were to occur, depending on how severe it would be, central banks have more flexibility today, than they did a year ago, for controlling it. Central banks have more control over demand factors than they do over supply. Inflation is the outcome of demand exceeding supply. The supply may fall short because demand is too high or because there are some supply specific constraints, or it could be a combination of both these reasons. In all of these situations, central banks can only cool demand and hope that supply can catch up. Central banks have very little if any impact on short-term supply issues. On the one hand, a recession is the outcome of weakness in demand which results in excess supply. Central banks can do more to help economies recover from depressed demand.

The most likely outcome for central bank action over the remainder of this year is for further tightening. Markets are in the process of factoring this in.

The third quarter of this year could be tough for precious metals markets as a combination of pricing in tighter monetary policy and seasonal weakness occur at the same time.

Prices could stabilize and rise during the fourth quarter of the year as seasonal weakness fades, tighter monetary policy is factored in, and markets redirect their attention to the potential for a recession in 2024.

Gold Market

After reaching a fresh record intraday high of $2,085.40 on 4 May, gold prices have been in a downward trend. At the time of writing this report, the price of gold was down around $156 from its peak. Prices were at $1,929. The decline in prices since early May was the result of a combination of factors such as the reduction and eventually removal of a U.S. debt default risk, a change in expectations of a monetary policy pivot, and the timing of a recession.

Despite the fairly strong decline in gold prices over the course of May and June, gold prices still are at historically elevated levels. Over the next few months, more downside in gold prices should be expected as the gold market enters a seasonally weak period and markets continue to price in the change in monetary policy expectations and the risk of a recession. If prices break below $1,875 and decline toward $1,820 or even $1,800 cannot be ruled out.

Stronger than expected economic data despite tighter monetary policy conditions have resulted in the market reevaluating their expectations of the timing of a recession and a loosening of monetary policy. The timing of both, a recession as well as monetary policy loosening have been moved further out and the markets have pivoted their expectation from one of monetary policy loosening during the second half of 2023 to one of further monetary policy tightening. The market is presently factoring in anywhere between 50 basis points (bps) to 75 bps in tightening compared to their expectations only a couple of months ago.

While gold prices are forecast to soften over the next few months, beyond this period gold prices have upside. CPM Group expects gold prices to rise during the fourth quarter of this year and into 2024. Gold prices could retest earlier record highs and could possibly rise beyond this over the next several years.

Further tightening in monetary policy over the next few months will raise market expectations of an economic recession during 2024, which will bode well for gold prices. In addition to monetary policy there are other risks, especially political risks both domestic and international that are expected to be supportive of gold prices.

Even the U.S. government debt default risk which is off the table for now and was one of the reasons for weaker gold prices in recent weeks will be back in focus during late 2024, when the debt ceiling is up for debate once again. Also while the risk of default was removed for the short term, the repeated risk/threat of default every time the debt ceiling is up for discussion tarnishes the reputation of U.S. government debt as a safe haven asset, which bodes well for alternative safe haven assets like gold.

Central Bank Demand

During the first five months of 2023, central banks were net buyers of gold. These entities purchased 1.4 million ounces of gold on a net basis during this period. much of the net purchases occurred during the first two months of the year with demand turning net negative starting in March.

The weakness in gold demand from central banks during April and May was not entirely surprising, given the strength in gold prices. Central banks have typically tend to be price sensitive pulling back on making fresh purchases and sometimes turning net sellers of the metal when prices rise strongly or to record high levels, as they did during May.

The expected softness in gold prices over the next couple of months could attract central bank demand which could help to provide support to gold prices.

Silver Market

Silver prices have been trending lower since early May. The weakness in silver prices has been outpacing that of gold, with the gold:silver ratio rising over the past couple of months. On a monthly average basis, the ratio stood at 85.1 in June, which is at the higher end of its historical range. While the ratio itself does not guide the direction of metals prices, a higher ratio suggests that silver is relatively undervalued compared to gold, with which silver shares an extremely high correlation. The long term (1970 to 2022) correlation between the prices of the two metals stands at 70%, with various periods when the correlation has been higher.

Over the next few months, silver prices have the potential to decline further. There is healthy support for silver prices at the $20.90 level. If this level is broken prices could slide toward $20.

The healthier than expected economic conditions and the ongoing drive by various countries to install solar power to meet their green energy targets is expected to be supportive of silver fabrication demand and silver prices.

That said, seasonal weakness in prices and the ongoing readjustment to the new expectations of a delayed recession and loosening of monetary policy are expected to have a stronger impact on silver prices, dragging them lower over the next few months.

Platinum Market

Platinum prices continued to weaken during June, a trend that has been in place since late April 2023. At the end of June, prices have essentially given back all of the gains that they experienced during 2023. Further weakness is possible in coming months. There is healthy support for platinum prices at the $900 level. If prices are able to break forcefully below this level, a decline to $830 or even $800 cannot be ruled out. Seasonal weakness in platinum prices, coupled with concerns of slowing economic growth are expected to weigh on platinum prices. That said, platinum prices already have declined a lot so far this year, and while more declines are possible most of the weakness in prices may already be behind the market. Platinum prices continued to weaken during June, a trend that has been in place since late April 2023. At the end of June, prices have essentially given back all of the gains that they experienced during 2023. Further weakness is possible in coming months. There is healthy support for platinum prices at the $900 level. If prices are able to break forcefully below this level, a decline to $830 or even $800 cannot be ruled out. Seasonal weakness in platinum prices, coupled with concerns of slowing economic growth are expected to weigh on platinum prices. That said, platinum prices already have declined a lot so far this year, and while more declines are possible most of the weakness in prices may already be behind the market.

While platinum has seasonal and macroeconomic factors working against it in the near term, healthy demand for commercial vehicles so far this year coupled with ongoing increase in use from the gasoline auto catalyst sector should help to provide support to platinum prices. There also is the risk of supply disruptions in South Africa’s mining industry, as the country heads into its winter when electricity demand rises, which could quickly reverse any weakness in prices. The threat of a supply disruption should prevent any further sharp decline in prices but unless there is an actual supply disruption prices are not expected to rise.

Palladium Market

Palladium prices continued on their declining trend that has been in place since prices reached record high levels in March 2022, shortly after war broke out between Russia and Ukraine. Toward the end of June, palladium prices had dropped to their lowest level since January 2019. Prices could decline further in coming months alongside other precious metals as these markets move through a period of seasonal weakness and investors remain concerned about the future of demand for palladium. A decline to $1,190 or even $1,170 is possible. While prices may not fall below these levels in the near term, any meaningful increase in prices also is unlikely in the short term. Prices are likely to consolidate around $1,200 over the next few months. Prices are likely to recover some during the last quarter of this year.

For prices to break out of this range to the upside, a supply shock or the prospect of stronger demand would be necessary. There is a higher probability of a supply shock, with risk of supply disruptions from South Africa’s mining sector elevated at this time. While this concern could provide some support to prices, it is unlikely to drive prices higher unless there is an actual disruption to South African palladium mine supply. On the demand side, while vehicle sales have help up ok so far, there are concerns that slowing economic growth and rising interest rates could crimp demand going forward. Palladium fabrication demand is not only negatively affected by the concern of future vehicle demand but also by the amount of palladium being taken in by the auto industry, with the increased partial substitution of palladium with platinum in gasoline auto catalyst and the growing market share of electric vehicles, which use no palladium.