Stars aligning’ for breakout rally in gold, silver

Alex GluyasMarkets reporter

Sep 16, 2024 – 1.29pm

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Investors are piling into precious metals as they prepare for the US Federal Reserve to kick off its easing cycle this week, with commodity strategists tipping silver and gold prices to keep on rallying well into next year.

Gold surged 3.2 per cent last week to a fresh record above $US2580 an ounce, while silver jumped 10 per cent to rise above the key $US30 an ounce level. Both metals are up more than 25 per cent this year.

Investors have been enticed by the safe haven appeal of precious metals. Flavio Brancaleone

The moves extended a rally in ASX-listed resources stocks that kicked off last week, and helped lift the sharemarket to within three points of its all-time high on Monday. Evolution Mining added 4.2 per cent to $4.50 and Northern Star Resources rose 2.3 per cent to $15.95.

It comes as bond traders ramped up bets that the Fed will deliver a jumbo half a percentage point rate cut at Wednesday’s meeting (Thursday AEST), after the Wall Street Journal reported last week that policymakers were tossing up a half or quarter-point move.

Futures markets are now pricing in a 55 per cent chance of a 50 basis point rate cut, up from 30 per cent one week ago. Either way, it would mark the first rate cut for the world’s largest economy in more than four years.

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Gold doesn’t offer income and therefore becomes less attractive as an investment when interest rates on risk-free assets such as cash and bonds go higher.

But that changes when the Fed starts cutting rates, which will likely attract Western investors after being largely absent during the metal’s sharp rally over the past two years, according to Goldman Sachs.

“In this softer cyclical environment, gold stands out as the commodity where we have the highest confidence in near-term upside,” said Goldman strategists Samantha Dart and Lina Thomas.

Trading ramping up

The broker’s bullish forecast, which tips the price to hit $US2700 an ounce by early next year, comes despite gold already surging 25 per cent in 2024.

The rally was initially fuelled by robust demand from emerging market central banks and Chinese consumers, highlighted by the country’s spike in retail imports from January to May.

While the People’s Bank of China – the world’s largest single buyer of bullion last year – paused its gold purchases for the fourth consecutive month in August, demand for the metal has shifted to commodity traders.

Indeed, activity across the two primary forms of gold trading in wholesale markets – over-the-counter and on exchanges – have recently spiked, according to Citi.

OTC gold demand soared 50 per cent to 329 tonnes in the second quarter compared to a year earlier – the highest quarterly print since the outbreak of the pandemic in 2020.

Meanwhile, gold exchange-traded-fund holdings are up 3 per cent in September for a fourth month of gains, according to Bloomberg. That’s a major turnaround, given ETF investors have been largely net sellers over the past three years.

Citi says “the stars are aligning” for the precious metal, with the broker tipping prices to test $US2600 an ounce by the end of this year, before surging to $US3000 an ounce in 2025.

Westpac agreed that gold breaching $US2600 was “on the cards” in the coming weeks, particularly given the ongoing demand for haven assets.

“The Mideast, North East Asia and Eastern Europe remain geopolitical hotspots, regardless of who wins the US presidential election, [which] likely keeps a safe haven geopolitical bid for gold in place,” said Richard Franulovich, the head of Westpac’s FX strategy.

Hi ho, silver !

But for all the attention on gold this year, silver has actually performed better.

While silver has benefited from similar drivers of gold, its use in the production of solar panels, which has expanded rapidly in China, means that industrial demand for the metal has helped.

Citi is particularly bullish, tipping the price of silver to surge 15 per cent this year to $US35 an ounce, and more than 25 per cent over the next 12 months to $US38 an ounce.

“The time is right to get even louder about [silver],” said Citi’s global head of commodities Maximilian Layton. “We believe that the set-up in silver is presently the strongest it has been in decades.”

Mr Layton added that silver was uniquely exposed to both parts of China’s bifurcated economy – benefiting from both solar and electric vehicle demand and the property crisis, which is driving an appetite for silver as a store of value.

It is also taking place against a backdrop of “massive” deficits in silver of around 15 per cent to 20 per cent of consumption, which Citi noted can only be met by holders selling. Silver has been in deficit since 2019.

Citi estimates that silver bar and coin holders need to sell around 1 per cent of their total holdings per month to meet excess demand for the metal. The broker’s bull case, to which it ascribes a 30 per cent probability, sees prices hitting $US45 an ounce by the end of next year.