Gold and silver face near-term hurdles

The resilient global growth outlook and upcoming Fed tightening could put some upward pressure on the nominal rate and weigh on inflation expectations. Overall, our central scenario is for a moderate rise in US real rates (nominal rates less market-based inflation expectations), which is a less-than-ideal environment for precious metals. In other words, an environment of rising rates (both long- and short-term) is likely to weigh on investment demand for gold and silver by raising the opportunity cost of holding these non-yielding assets in the next few quarters.

Already, gold does not show any significant premium or discount compared to US 10-year real rates. Based on analysis going back to 2012, the ‘fair value’ for gold would be about USD1,600 per troy ounce when the 10-year real rate is -0.4%. But the real US 10-year rate was -1.0% on 9 December and gold was at USD1,775 per troy ounce, explaining our relatively cautious outlook for gold over the coming months.

In the longer term, however, our belief that the Fed is stuck in a debt-dominance monetary regime suggests that interest rates should remain low, limiting the downside risks for gold and silver while in the short term, higher jewellery demand is likely to provide some support to both precious metals. The structural shift toward green energy should lead to a structural increase in industrial demand for silver, although the timing and the magnitude of this increase are hard to quantify.

Our three-month projection for gold stands at USD1,770, our six-month projection at USD1,680 and our 12-month projection at USD1,800 per troy ounce. Our projections for silver are, respectively, USD24.0, USD24.0 and USD26.0.