Gold Hits New Record Highs, Can Other Metals Follow?

Gold has pulled back somewhat following recent record-high prices, prompting an examination of potential near-term performance in its fellow group members, silver and copper.

The Dollar (AKA, the Fed) Is King

Metals traded within a narrow range this week as the markets anticipated potential Fed action, highlighting dependence on the US dollar. Bond yields, especially those exceeding inflation, can offset demand for precious metals. However, the uncertainty surrounding the pace of future policy easing has contributed to gold's trend. The consensus of lower interest rates helped gold rise to new highs over the past few months (although inflation-adjusted prices remain lower).

With the Fed keeping rates unchanged and projections of three rate cuts this year intact, concerns of a more hawkish tone have abated. As a result, gold is back on its trend, hitting new record highs. Recent dollar strength reflecting initial optimism for rate cuts has partially reversed gold moves. However, the trend may persist in the longer term following the FOMC. After all, rate cuts remain probable, with timing uncertain. Bulls also cite this narrative for silver potentially reaching a new decade high. For example, the Silver Institute forecasts global demand will push prices to $30 per ounce, last observed in early 2013.​

Potential Supply Constraints

In addition to expectations of lower yields increasing the appeal in precious metals, issues of production growth have also emerged as a concern. Over the past few years, large mining firms have pursued an acquisition strategy of smaller operations, leveraging low interest rates. This has decreased exploration activity since 2016, though companies have ramped up exploration efforts following the pandemic. However, it takes several years for new mining operations to commence production. This implies the potential for temporary supply constraints in the near term just as demand increases from lower bond yields.

 Copper markets also factor into supply dynamics, as gold and silver deposits are commonly found near large copper reserves. Copper demand was projected to rise to meet the needs of energy transition initiatives. However, slower growth in China, the world's largest copper importer, coupled with levelling consumption growth, created a surplus last year. This is expected to persist into the current year. Lower copper prices leading to reduced production could mean less supply of the associated gold and silver, potentially supporting higher prices for those precious metals.​

Silver Approaches 2-Year Range Top

The price of silver is approximately 100% lower than its record high in 2011, representing significant upside potential relative to gold or copper. While gold continues its bullish trend or period of consolidation, silver could break out of its 2-year trading range above $26.80 per ounce. A successful breakout would confirm a falling flag reversal pattern, suggesting prices could rise above $30 per ounce and potentially reach $35 in the near future. However, failing to surpass the local high could result in prices reversing lower, with a decline toward $20 possible if support at $23 is breached.

Source: SpreadEx / Spot Silver

Key Takeaways

Gold prices keep hitting new record highs post FOMC, prompting an examination of near-term performance in silver and copper. In recent years, declining production growth from lower mining exploration could lead to temporary supply constraints for precious metals, supporting higher prices, as demand is expected to increase from lower bond yields. Silver, in particular, approaches the top of its 2-year trading range, with a breakout potentially signalling further price rises.