April 2022

Gold and silver prices have had their upward march interrupted by the specter of rising U.S. Treasury interest rates. Prices have been rising in response to two primary factors: Russia’s invasion of Ukraine and inflation concerns and expectations.

The rise in interest rates put an abrupt end to this, with gold and silver prices declining sharply over the past several trading days, notably in line with the prices of stocks, bonds, and other commodities.

At first interest rates were rising in expectation that the Federal Reserve Board was going to both start a cyclical round of increases in the Federal Funds rate and beginning to reduce its balance sheet through a process of not purchasing bonds to replace maturity Treasury and agency bonds. The market reactions increased after the first round of FOMC interest rate increases and in the face of a steady stream of comments by Fed officials that further rate hikes were coming, including recent comments of a possible if not probable 0.5% increase at the end of the FOMC’s meeting in the first week of May,

The key question for investors is whether this is an interruption or the end of a bull market.

The answer lies in the economic and political environment that drives investment demand. That environment remains a minefield planted with numerous problems, suggesting the Fed-inspired gold and silver price sell off is most likely an interruption in longer term bull market price moves than the end of the upward price moves since 2019.

In terms of inflation, CPM continues to expect consumer prices to remain high and to rise, but we also continue to expect that inflation rates – the percentage increases in prices – will decline dramatically by June or July. This will remove some of the inflation-buying pressures on gold and silver prices, but not all of it.

The Russian invasion of Ukraine meanwhile appears likely to continue for at least the next two months. Both the war itself and the long-term implications of the Russian aggression for international politics and power should be expected to remain strong factors stimulating investor interest in gold and silver.

Russian aggression’s effects on the international political, economic, and financial balances will be inseparable with other international tensions, from the strains within the European Union to China’s role in the world.

Already China’s tilt toward Russia since the Russian invasion of Ukraine has coincided, perhaps caused, an acceleration of what already was a growing uneasiness on the part of international investors about exposure to China. There have been multi-billion dollar liquidations of overseas investments in Chinese equities and bonds, which should be expected to continue well into the future.

Domestic U.S. politics meanwhile will provide a steady stream of uncertainty that will boost investor interest in gold and silver, and consequently support high and rising metal prices.

There is a much larger list that could be itemized here, but for brevity let us just wrap up by pointing out that the Covid pandemic is still an issue that has the potential to disrupt economic recovery.

Finally, it must be noted that the very factor that has been driving gold and silver prices lower over the past two trading days is bullish for gold and silver in the longer term. Yes, precious metals markets will remain rattled by the prospects of higher U.S. Treasury interest rates for several more weeks or months, but in the longer term beyond the next few weeks the rise in interest rates will prove positive for gold and silver investment demand and prices regardless of how the rate increases proceed.  

• If interest rates keep rising to the point where they are problematic for continued economic growth, that would be positive for gold and silver prices.
• If interest rates rise enough to quell inflationary pressures but not turn off economic growth, (along with other variables that have been behind the rise in inflation since February 2021 that are expected to moderate in the next two quarters), then that will be good for gold and silver as well.

In summary, CPM sees the sharp declines in gold and silver prices over the past several trading days as an interruption in a multi-year cyclical and a longer term secular upward move in precious metals prices. There seem to be few reasons to suspect that the past few days are anything more than an interruption in these longer term trends.