Precious metal prices fell in June by the most since November 2016. What comes next?
Gold and silver had one of the most brutal months in recent history in June. The decline came in the context of the Fed shifting its tone to more hawkish at the June meeting, strengthening the dollar across the board.
A hawkish tone suggests rates will pick up from the lows due to stronger economic growth. Bonds declined, yields rose, and the price of gold fell as a consequence.
But on its way lower, the price of gold reached long-term dynamic support at $1,768. It has since recovered, and is currently trading above $1,800 ahead of US inflation data for June, which is expected to be released later today.
Gold fell over 7% in June, while silver declined by 6.78%. This means that gold gave back all of its May gains, as did the gold senior equities as tracked by the Solactive Gold Miners Custom Factors Index (SOLMCFT), which declined over 12% in June.
At the same time, the Dollar index had one of the best months in recent years, up 2.90%, the largest monthly change since Q4 2016. In other words, a stronger dollar led to a decline in the price of precious metals.
What to Expect in the Third Quarter
Long-term fundamentals on the gold market remain solid. Because of the unprecedented monetary and fiscal expansion, inflation is expected to overshoot the Fed’s target in the short and medium term.
Silver is still moving within a possible bullish flag, a technical pattern that typically leads to higher prices.
The only unknown for the price of gold comes from its inverse relationship with the US 10-year yield. Yields have an inverse relationship with the bond price, but the bond price is strongly influenced by that quantitative easing program still in place.
When the Fed tapers and ends the bond-buying program, yields will reflect the true stance of the US economy. Rising yields should put further pressure on gold while rising inflation supports the price of gold because investors look for safety in the yellow metal.
All in all, an interesting quarter lies ahead. The way the Fed communicates its intentions is key to further developments in the precious metals markets.