Precious Metals Plummet on Dollar Strength, Rate Hike Bets
Last week saw a dip in precious metals prices and stock market gains, despite fears of a recession in the U.S. As this week began, investors were focused on the health of the U.S. economy and central bank policy in the wake of record inflation. This being so, scheduled inflation data releases, jobless claims, and Fed speak quickly emerged as market drivers throughout the week.
While CPI data was not scheduled for release until Wednesday, forecasts began to circulate by Monday that highlighted the potential for a higher-than-expected inflation reading. Investors braced for this, and corporate earnings announcements, which were set to begin on Tuesday.
Investor apprehension resulted in an equities dip on Monday, with the Nasdaq falling the most at 2.3%. This marked the end of a four-day winning streak for U.S. stocks. Despite investor caution, gold remained near nine-month lows of $1,735, while silver fell by 1.2% to $19.06 an ounce. The probability of a more aggressive Fed and a surging dollar index would prove to be reliable detractors to gold and silver throughout the week.
By Tuesday, the dollar reached parity with the euro for the first time in twenty years. This came as the dollar index touched twenty-year highs near 108.31. Meanwhile, caution was prevalent in European markets as Russia suspended delivery of gas via the Nord Stream 1 pipeline, which is the most significant source of energy for Europe.
The pause in service was the result of regularly scheduled maintenance, but some fear the interruption in service may continue beyond what is necessary as the conflict in Ukraine continues. While metals enjoyed support from cautious investors, dollar strength would weigh on bullion. As a result, gold saw little change on Tuesday, with spot hovering near $1,725, while silver dipped below $19 for only the second time since July of 2020.
Wednesday’s release of inflation data revealed a 9.1% year-over-year rise in June in the consumer price index. This reading exceeded forecasts closer to 8.8% and would mark the most significant consumer price increase since 1981.
Existing fears of a recession were amplified following Wednesday’s inflation news. Analysts from major banks such a Bank of America and Wells Fargo echoed these concerns in forecasts that predicted a recession later in 2022. The Fed’s beige book survey was also released Wednesday and provided for a similarly gloomy outlook. Fed governors in five districts cited concerns over a potential recession, while others predicted inflation would continue to run hot throughout 2022.
Stocks dipped following Wednesday’s inflation news. While major indices fought their way back from more significant intraday losses, The S&P 500 and Dow Jones Industrial Average would still lose 0.46% and 0.65% respectively.
Another record inflation print seemingly increased the odds of more aggressive Fed rate hikes, as markets began to price in a 100 basis point increase for the July FOMC meeting. Higher interest rates have historically proven to be bearish for precious metals, at least in the near term.
This pressured gold to further bottoms just above $1,700 on Thursday, while silver touched a weekly low of $18.16 an ounce. After a mixed finish on Thursday, stock market futures pointed to a higher Friday open. However, major averages are currently eyeing weekly losses, with the Nasdaq slipping the most at 2.7%.
Meanwhile, precious metals continue to languish near relative lows, while the dollar rally has paused near multi-decade highs. Currently, gold is at $1,704, which is 2.1% lower for the week. Silver rallied this morning, and is currently near the $18.50 mark, which would be a 4.1% weekly decline.