6/25/2024
Gold and silver retreat on hawkish FedSpeak
OUTSIDE MARKET DEVELOPMENTS: The Chinese yuan remains under pressure, falling to a 7-month low against the dollar. This puts the tightly controlled currency within striking distance of lows not seen since 2008.
The world's second-largest economy has yet to fully recover from the COVID-era, leading investors to reallocate funds elsewhere. The U.S. has been a particularly attractive destination due to high yields and strong stock market.
Businesses in China are hoarding dollars on expectations that the downtrend in the yuan will continue. They are also worried about the upcoming U.S. election and the implications for tougher trade policies should Donald Trump win.
Weakness in the euro is also helping to underpin the dollar amid diverging central bank policy. The ECB cut rates for the first time in 5 years on 06-Jun. Today the ECB's Isabel Schnabel downplayed the divergent policy as "slight" and "temporary." The differential between the ECB's deposit rate of 3.75% and the midpoint of the Fed funds target range is 162.5 basis points. That's significant.
Fed Governor Michelle Bowman said she doesn't anticipate any U.S. rate cuts this year. Rather she projects rate cuts in 2025 if inflation continues to moderate. She remains open to a rate hike should price risks escalate. “I remain willing to raise the target range for the federal funds rate at a future meeting should progress on inflation stall or even reverse,” Bowman said.
The S&P Case-Shiller home price index rose 1.4% to a new record high of 329.78 in Apr. The FHFA home price index rose 0.2% to 424.3 in Apr, also an all-time high. The unwillingness of U.S. homeowners to give up their low mortgage rates is keeping supply tight and underpinning prices.
The Chicago Fed National Activity Index rose to 0.18 in May from a negatively revised -0.26 in Apr.
Consumer Confidence and the Richmond Fed Index are out later this morning. We'll also get FedSpeak from Cook and Bowman will speak again.
GOLD
OVERNIGHT CHANGE THROUGH 6:00 AM CDT: +$1.39 (+0.06%)
5-Day Change: -$0.64 (-0.03%)
YTD Range: $1,986.16 - $2,449.34
52-Week Range: $1,812.39 - $2,449.34
Weighted Alpha: +22.64
Gold fell to fresh intraday lows after Fed Governor Bowman said she did not expect any rate cuts this year and suggested a rate hike was not off the table. Treasuries retreated in reaction, but the dollar index remains higher on the day thus far.
Chinese yuan weakness makes gold an attractive investment in the world's largest gold-consuming nation. It was the top-performing RMB-denominated asset through May with a return of more than 15%. Gold-backed ETFs saw inflows of RMB1.8bn (US$253mn) in May.
Bar and coin demand cooled in May due to record-high prices and high premiums. While the current level is arguably more attractive and premiums have moderated, some may be waiting for an even lower price. Nonetheless, I suspect that persistent yuan weakness and concerns ahead of the U.S. election will lead to improved physical demand in China.
The market is also eagerly anticipating any news on PBoC gold purchases in June. Was May's pause a one-off or is something more significant happening?
Last Friday's low at $2,317.85 marks initial support. Additional barriers are noted at $2,307.45 (18-Jun low), and $2,296.92 (13-Jun low) which protect the more important $2,287.64 low from 07-Jun.
SILVER
OVERNIGHT CHANGE THROUGH 6:00 AM CDT: +$0.027 (-0.09%)
5-Day Change: -$0.036 (-0.12%)
YTD Range: $21.945 - $32.379
52-Week Range: $20.704 - $32.379
Weighted Alpha: +33.87
Silver tumbled to new 5-session lows on this morning's hawkish FedSpeak. The inability of the white metal to regain $30 in the wake of last Friday's sell-off leaves the downside vulnerable in the short term.
I wrote yesterday that strength in the U.S. manufacturing sector should provide support to silver. However, growth risks in China may be an offsetting factor.
China's GDP grew at a 5.3% annualized pace in Q1. This better-than-expected performance prompted the IMF to upgrade its 2024 projection to 5.0% from 4.6% previously. Q2 forecasts are generally right around 5.0%.
However, government stimulus efforts don't seem to be working particularly well in the face of an ongoing property crisis and demographic pressures. The IMF warns that China's GDP could drop to 3.3% by 2029 due to an aging population and reduced productivity.
The violation of support marked by yesterday's low at $29.356 leaves $29.022 (18-Jun low) vulnerable to a challenge. The latter protects the more important $28.719 low from 13-Jun.
A rebound above $29.422 would ease intraday pressure on the downside, but $30 must still be regained to set a more positive short-term tone. Today's earlier high and Monday's high at $29.645/$29.714 respectively provide an intervening barrier.
Peter A. Grant
Vice President, Senior Metals Strategist
Zaner Metals LLC
Tornado Precious Metals Solutions by Zaner
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