Can Silver and Gold Maintain July’s Gains?

Precious metals have risen as the dollar weakens on expectations that the Fed has run out of rate hikes. In July, gold is up over 3%, and silver is nearly double that at the time of writing. Did the trend just change?

Is There More To It Than The Dollar?

After the FOMC raised rates by a quarter point on Wednesday, nearly two-thirds of traders believe that the Fed is done hiking this year. The Fed still heavily implies one more rate hike, however. Treasury yields have started to even off as fewer and fewer economists see a recession coming, leading to the yield curve inversion to shrink. With the dollar's relative value in decline, the things priced in dollars, like gold and silver, have been buoyed. Unless the Fed convinces more traders that they will go through with another hike, there is reason to believe the dollar could continue to weaken through the rest of the year.

But what about a recession? Gold and silver tend to have increased demand as a safe haven in case of a recession. While the yield curve inversion has been shrinking, that is no indication that a recession has been avoided. In fact, the yield curve inversion tends to shrink before the recession hits. Typically, recessions come as a surprise; with most economists predicting a hard landing, it would actually be out of pattern for a financial crisis to develop. Gold bulls might have to wait before the recession rally kicks in.

So, No Bump In Prices?

Press reports on Thursday suggested that analysts believe that gold and silver prices will be lower in the latter half of the year. The median of the 36 analysts surveyed by Reuters showed an expectation of gold declining over the coming months. The forecast is for gold to average $1,995 this quarter, dropping to $1,944 next quarter and going to $1,988 next year. That would be below the near-record highs seen earlier this year in the wake of the banking crisis and the debt ceiling debacle.

According to these analysts, the potential for gold to make another run at a record high would depend on whether the Fed was forced to cut rates due to a broad-based, longer-lasting economic contraction. With the GDP surprising to the upside yesterday, Thursday, Fed officials talking up more rate hikes in the near term are seen as raising the risk of a hard landing. But, if the market is right, the Fed doesn't hike, and the economy skates through by underperforming instead of outright contraction, the expectation is that gold will stay under the $2,000 mark for the foreseeable future. On the other hand, Silver could see some upside, with the same analysts expecting it to average $23.52/oz this year but rising to $25.00 next year.

Silver in Broadening Wedge?

Silver might have completed a broadening wedge at $26.50/oz unless a final upward leg gets past the peak for an attempt at $27.50, pending further upside and leaving behind a potential 5-wave impulse. Typically, wedges incur deep corrections, exposing the Fibonacci supports at $22/oz and $21/oz. However, the upward trend could continue towards $26.40/oz with a flag completed by $22.60/oz.

Chart: SpreadX / Silver

Key Takeaways

In July, gold and silver prices have risen due to a weakening dollar and expectations that the Fed will not raise further. However, the Fed still suggests another hike, but fewer economists see a recession coming, which has caused the yield curve inversion to shrink. If the Fed fails to convince traders, the dollar may weaken throughout the year. Analysts predict that gold prices will decline in the coming months, with an average forecast of $1,995 this quarter and $1,944 next quarter. On the other hand, silver prices are expected to increase slightly, with an average forecast of $23.52/oz this year and $25.00 next year. Ultimately, the future of these precious metals depends on factors such as the Fed's actions and the state of the economy.