Fed scenario and precious metal price trend

Expectations of Fed rate cuts are the main driver of precious metal prices

The first half of 2024 has seen a boom in the precious metals market as investors focused on the Fed’s moves, especially as US inflation showed signs of cooling. According to data from the Vietnam Commodity Exchange (MXV), surpassing the growth rate of gold prices, silver prices have increased by more than 25% since the beginning of the year.

In addition to the need for safe-haven investments amid geopolitical conflicts, one of the main reasons supporting the silver price increase comes from the expectation that the Fed will cut interest rates this year. Back in early March, when silver prices began to surge, the market expected the Fed to cut interest rates three to four times starting in June. This caused the USD's rise to slow down, even plummeting at times, and indirectly fueled the rise in the price of precious metals, which are sensitive to interest rates and currency fluctuations.

Meanwhile, the European Central Bank (ECB) on June 6 became one of the first banks to pave the way for a monetary easing cycle by cutting its key interest rate to 3.75% from 4%, marking the first rate cut since September 2019. Silver and platinum prices also rose sharply during the session, mainly due to market expectations that the Fed will soon follow the ECB's lead.

However, last week's trading session saw a sharp decline in precious metal prices, with payroll data increasing more than forecast, eroding investors' confidence in the market and putting the Fed in a difficult position.

Fed in dilemma

According to data released by the US Department of Labor on June 7, the US non-farm payroll added 272,000 jobs in May, a sharp increase compared to the revised 165,000 jobs in April and far exceeding the forecast of 190,000 jobs from economists.

Hourly wage growth also beat forecasts, rising 0.4% month-over-month and 4.1% year-over-year in 2023. Meanwhile, the unemployment rate, although rising to 4%, the highest since February 2022, is still considered low compared to the post-crisis period in 2000 and 2008.

The steady labor market and rising incomes are a sobering message for the Fed’s efforts to cool inflation and have turned the market’s optimism upside down. Bets on a September rate cut, the scenario most traders expect, have fallen to about 50% from more than 60% a week ago, according to the FedWatch tool.

However, the heat in the labor market is showing a picture that is contrary to some recent data, reflecting the slowdown of the US economy. In particular, data in the second adjustment of the US Bureau of Economic Analysis shows that the growth of US gross domestic product in the first quarter of 2024 only reached an increase of 1.3% compared to the previous quarter, instead of increasing by 1.6% as in the preliminary announcement.

Mr. Pham Quang Anh, Director of the Vietnam Commodity News Center, said: “The goal of a “soft landing” will make the Fed pay more attention to its monetary policy. Therefore, the possibility of the Fed pivoting its policy in September is still entirely possible.”

Precious Metal Price Trend Depends on Fed Scenarios

In the current context of the US economy, it would not be surprising if the Fed did not make any new moves at the Federal Open Market Committee (FOMC) meeting early on the morning of June 13, and it would not be too surprising if Fed officials continued to consistently advocate maintaining interest rates for a longer time, until inflation falls to the 2% target in a sustainable manner.

Pressure from the Fed's monetary policy could put silver prices under pressure to correct in the short term as the market turns more cautious, which is also reflected in estimates from a range of banks.

In its latest forecast, Citi Bank said the Fed will cut interest rates by 75 basis points this year, in three successive months, instead of four cuts starting in July. JPMorgan even changed its forecast from three cuts this year to just one, saying the Fed will not make any move until at least November.

According to Mr. Quang Anh, these are also the two most likely scenarios that can happen at the present time. If the Fed lowers interest rates as predicted, the USD may weaken, creating momentum to boost precious metal prices. In the first scenario, August is expected to mark the second boom period in the market, silver prices may conquer the 35 USD/ounce mark again.

In addition, supply-demand balance and geopolitical risks cannot be ignored as these are also considered two factors driving the precious metals market in the second half of 2024. According to the International Silver Institute, the silver market is heading for its fourth consecutive year of deficit, with the deficit in 2024 forecast to be the second largest in history. Meanwhile, tensions in Gaza between Israel and Hamas continue and the conflict between Israel and Lebanon is heating up, further strengthening the role of safe-haven investments for assets such as gold and silver.

According to Government Electronic Newspaper

Source