Metals Rise in July on Data, Dovish FOMC

Base metals markets started July on a positive footing as weaker US economic data reinforced expectations for monetary easing from the Fed.

Catching The Tailwinds

Commodity prices have been on an upswing recently due to adverse weather events, like an unusually active hurricane season and high temperatures in Africa. Combined with a weaker dollar, silver, copper and palladium rose over 5%, with gold and platinum prices posting over 2% gains. Markets translated the FOMC meeting minutes as largely dovish, providing an initial boost. Then Friday's jobs report showed unemployment rose while average wages declined.

Expectations for an interest rate cut in September increased to 72% from 58% just a week earlier. However, the chances of a second rate reduction by year-end remained largely unchanged, suggesting the overall trajectory for rate expectations was steady with only the timing pulled forward.

Bond yields reversed their preceding rise at the end of the second quarter as options expired. This trend accelerated last week, supported by the economic data and a weaker dollar, benefiting commodities priced in dollars. Metals typically move inversely to bond yields.

What's Next for Metals?

The recent Bitcoin price action, a gauge of risk appetite, combined with rising metal prices, suggest investors are considering safer options before the summer holidays and in a typically underperforming market. The cryptocurrency has declined as funds have been withdrawn from ETFs and sales expectations have risen following Mt. Gox's repayment of customers. Bitcoin's drop, along with rising gold prices.

Analysts push gold as an investment this year, with one bank predicting it will reach $2,700 per ounce next year. Increased government spending, geopolitical issues, and inflation concerns are cited as reasons supporting this view. Central banks are also expected to continue their record purchases of gold while demand remains strong among retail investors. Total gold supply and demand rose 3% last quarter, as a drop in mine production was offset by higher recycling and more efficient extraction as prices increase. However, declining interest rates ahead of an anticipated rate cut could have a greater short-term impact on silver prices.

Silver Eyes Higher Levels

The price of silver has been up 32% this year, surpassing its 2020 high of $30 per ounce to reach a 10-year high of $31.90 per ounce. If the current trend continues, prices could potentially rise to $35 per ounce, given that the measured move projection from the previous low of $22.50 per ounce completing a broadening wedge is respected. However, if bulls cannot hold the round support, silver may decline to $26.40 per ounce and possibly lower.

Source: SpreadEx / Silver

Key Takeaways

Base metals began on a positive footing in July due to weaker US data, weather events and a weaker dollar. Markets interpreted FOMC minutes as dovish, with Friday's jobs report showing unemployment rising and wages declining, increasing chances of a September rate cut. Analysts recommend gold in the light of government spending, geopolitics and inflation concerns, with the central bank and retail demand remaining strong. However, declining rates may have a greater near-term impact on silver prices.