LAWRIE WILLIAMS: Gold and silver dive on less downbeat Fed but recover fast

Although the U.S. Fed cut interest rates as expected by 25 basis points at the just-ended FOMC meeting – the first cut since 2008 – gold and silver (and the pgms to a lesser extent) all fell sharply despite the cut being long-anticipated, and not by nearly enough for President Trump.  Here the devil was in the detail in Fed chair Jay Powell’s statement following the meeting where he appeared to  somewhat ambivalently rule out the likelihood further rate cuts this year; prior to Powell’s statement the markets had been anticipating the July cut would be followed by a further two, or even three, more cuts in 2019.  The Fed statement and the small rate cut led to a surge in the dollar index (DXY) to close to 99 – the highest level since May 2017 – which will also have been a significant contributor to the precious metals price falls.  The DXY Index was at around 96.6 earlier in July.

As a result gold and silver prices plunged – the former by over $20 from the levels immediately ahead of the FOMC meeting and the latter by around 50 cents – an even bigger fall in percentage terms as befits the volatility inherent in silver price performance.  As a result the Gold:Silver Ratio moved back up to close to 88 – still way better for silver investors than the recently-seen 93.

We see all this volatility as something of a knee-jerk reaction and expect precious metals prices to recover, at least part-way, over the next few days.  (With President Trump escalating the trade war with China, this apperas to have happened already - rather sooner than we anticipated)  Powell did comment in his press statement that recent U.S. data suggested that the country’s economy seemed to have been improving and even the 25 basis point rate cut was more as an insurance policy than a necessity at this time.  But economic data, on which the Fed makes its decisions, can be volatile.  It should also be remembered that the whole of North America only accounts for probably around a quarter of the global economy so although the U.S. is currently dominant in setting precious metals prices, the ups and downs in the economies of many other  countries should also be having an impact.

And there are other positive factors out there which are affecting the gold supply/demand balance.  Notably Central Bank gold purchases are running at their highest level in over 50 years with 374.1 tonnes already added to reserves in the first half of the current year according to the World Gold Council (WGC) in its latest Gold Demand Trends report.  Capital Economics in a statement which reported Central Bank H1 gold buying at a similar level to the WGC reckons that full year buying by Central Banks will be around 725 tonnes – the highest level in 59 years and surpassing last year’s 51 year peak.

Despite the Fed’s optimistic views on the U.S. economy, talk of a recession commencing within the next year remains, and ominously the latest Chicago PMI reading supports this thesis with the July figure falling to 44.4 representing the biggest drop since the 2008 financial crisis – but this was very much overshadowed by the Fed statement.

As we said above, though, once the Fed figures and statements are pored over and analysed we would expect the gold price to recover some of its lost ground, and to drag the more volatile silver price along with it.  Any more adverse data like the Chicago PMI reading see a big surge, although our doubts about gold achieving a $1,450 level have almost already been overtaken by events with a a geopolitical flare up, inspired by a Trump imposition of higher tariffs on Chinese goods has appeared to already have added fuel to gold and silver flames - although not to pgms which are down sharply.

01 Aug 2019

About the author

Lawrence Williams

Lawrence (Lawrie) Williams is a well known London-based writer and commentator on financial and political subjects, but specialising in precious metals news and commentary. He is a qualified and experienced mining engineer having graduated in mining engineering from The Royal School of Mines, a constituent college of Imperial College, London - recently described as the World’s No. 2 University (after MIT).

e: lawrie.williams@sharpspixley.com