GOLD & SILVER PRICE FORECAST – RALLY TO RESUME IN Q3 IF FED TABLES TAPER TALKS
- Gold and silver prices pulled back during the latter half of Q2 amid Fed taper speculation
- US Dollar strength might reverse and boost precious metals if the FOMC delays tapering
- Substantial further progress on inflation, and full-employment in particular, are focal points
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I’ve been racking my brain for the final two weeks of Q2 trying to come up with a top trade idea for the upcoming quarter. This is largely predicated on my lack of conviction for the general direction of markets over the next three months. There is a great deal of uncertainty for outlook in light of new delta covid variants and central bank tightening, and it seems to me that rangebound price action is the most likely scenario for global assets.
That said, I would argue that simply holding cash is a position in and of itself, which may be a prudent tactic for traders and investors during Q3. After all, there is the lingering threat of Fed tapering and potential for the US Dollar to appreciate in value off multi-year lows. Having cash on the sidelines can also provide market participants with the means to exploit future potential opportunities that there is greater conviction for.
We have already seen the USD start to stage a rebound in response to markets positioning for the Fed to start unwinding asset purchases before raising interest rates. In fact, the bond market is pricing in a 25-basis point interest rate hike by 2022 after the latest Fed dot plot signaled two rate hikes by year-end 2023. Correspondingly, interest rate sensitive assets, like gold and silver, have been hit with an influx of volatility.
| Change in | Longs | Shorts | OI |
| Daily | 7% | -5% | 1% |
| Weekly | 11% | -9% | 1% |
Precious metals unsurprisingly pulled back due to the prospect of Fed tightening, and there could be more headwinds faced in Q3 as markets speculate on the Federal Reserve’s taper timeline. Looking at long-term nominal interest rates and real yields, however, there remains a case to be bullish on gold and silver. Specifically, potential episodes of weakness could provide attractive opportunities for traders and investors to go long gold and silver.
If the last normalization cycle serves as any compass for the Fed’s policy roadmap, it seems likely that the central bank will delay tightening financial conditions. Fed Chair Powell recently alluded to this in a congressional testimony where he said “the Fed will do everything we can to support the economy for as long as it takes to complete the recovery.” Powell furthermore acknowledged that record low unemployment rates for non-white Americans was a major benefit of the long economic expansion into 2019. Fast forward to today and we see plenty of room for improvement on the unemployment rate, which arguably understates the shortfall in employment due to discouraged workers falling out of the equation.
This brings to focus potential that the Fed will continue looking through ‘largely transitory’ inflation increases due to base effects and supply chain disruptions while placing greater emphasis on its other mandate – reaching full employment. The recent shift to average inflation targeting also gives the Fed capacity to tolerate inflation overshoots in the medium-term. As such, if the Fed drags its feet for kicking off the taper timeline, markets could unwind rate hike bets. That would likely be bullish for gold and silver prices if this scenario materializes, which in turn, could present opportunities worth pouncing on with sidelined cash. After all, the broader trend for long term interest rates and real yields is lower for longer, which stands to be supportive for gold and silver prices.
-- Written by Rich Dvorak, Analyst for DailyFX.com
Connect with @RichDvorakFX on Twitter for real-time market insight
