Silver prices set 12-year highs in September, but lacked follow-through buying

Key Takeaways

• Gold continued to set fresh highs in September

• With bullish developments priced in, there is risk of profit-taking

• Further US rate cuts will provide ongoing support...

• ...as will further escalations in the geopolitical situation, especially in the Middle East

• A broader market correction could drag gold prices down initially

• Silver prices set 12-year highs in September, but lacked follow-through buying

• The lower interest rate environment, plus the Chinese stimulus, to boost demand for industrial precious metals

Gold repeatedly set fresh record highs in September, with US monetary policy and the deteriorating geopolitical situation supporting the rally

• The US Federal Reserve’s 50 basis point interest rate cut ensured further dollar weakness and a bullish backdrop for gold prices

• The escalation in geopolitical risk was further reason for investors to seek safe-havens 

• Iran’s greater involvement in the Middle East conflict now raises the risk of oil supply disruptions, which in turn raises the risk of a wider confrontation

• Funds increased their exposure to gold, but funds will be sitting on large unrealised profits, which raises the risk of profit-taking

• ETF investors have only been net buyers for five months, they were late to the party so may have more catching up to do

• High gold prices are dampening physical demand from consumers and a rebound in Chinese equities is a potential headwind for Chinese buying

Funds increased their exposure to gold, but funds will be sitting on large unrealised profits, which raises the risk of profit-taking."

Silver prices momentarily broke higher to set a 12-year high, but so far the market has struggled to build on that development

• US interest rate cuts and Chinese stimulus to boost industrial demand for silver

PGM prices rally on prospects for better industrial demand

• Improved demand outlooks and supply deficits to support PGM prices

• Jewellery industry looking to promote platinum jewellery given high gold prices impact the affordability of gold jewellery

Multiple factors push gold to fresh highs throughout the month 

Gold prices had a stellar performance in September, climbing from one record high to another, with the most recent high at $2,685.60 per oz. There are multiple drivers, but the initial trigger for the upward acceleration in prices was the higher than expected US Consumer Price Index (CPI) and Producer Price Index (PPI) data that showed inflationary pressures were still around, even though the US was almost certainly about to cut rates. In the immediate aftermath of the Federal Reserve’s interest rate cut, gold prices dropped $30 per oz, but the sell-off was short-lived and the fact the interest rate cut was 50-basis points (bp) and not the more normal 25bp, was seen as overall bullish for gold. This was especially so given the other considerations, such as the deteriorating geopolitical situation in the Middle East with Israel’s focus shifting to Lebanon, where an intense air bombardment got underway.

Heightened geopolitical tension

Israel’s pivot to target Hezbollah in Lebanon and the speed, scale and effectiveness of the attacks has raised the risk in the Middle East, as seen by Iran’s rocket attack on Israel. But, so far other powers in the Middle East do not seem to be taking sides, suggesting that this is still a contained conflict, Israel against the non-state resistance groups of Hezbollah and Hamas, with Iran so far supporting the groups that they nurtured. 

Not only would higher oil prices be inflationary, but they would have far reaching, indeed global, economic implications."

If Israel and Iran go to outright war, then that could produce a bigger global problem as it is more likely that such a development could see Iran target the oil supply chain. Not only would higher oil prices be inflationary, but they would have far reaching, indeed global, economic implications.

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